Picture this: You're at a networking event and you get the opportunity to chat about your services with several interested people, so you happily hand over your business card with a handshake. Then someone asks you about your pricing. (Crickets.) Are you prepared to answer? To ask the right questions prior to sharing a number? If the answer is no, you need some help developing your pricing strategy. Have a pricing strategy in place that will allow you to accurately evaluate your goods or services, confidently share your prices, and evolve your pricing as your business grows and changes. By considering several important points before setting a pricing strategy, you’ll be prepared to move forward with putting hard numbers on paper—or your website.
Know your worth
As a smart businessperson, you’ve likely checked out your competitors’ offerings and prices more times than you’d like to admit, but it is that kind of research that will help you to get a feel for the market within your specific industry. How do your prices compare? Have you properly assessed the cost to you for producing your good or service? Sarah Hennigan, owner of Money Clarity, suggests that when figuring out pricing, it's important to take into consideration everything that has gone into creating your offering, not just your hourly rate.
“Your qualifications, the courses you have taken, the time you have spent perfecting your craft and the value that your service provides. Write it down and speak it out loud a few times beforehand ... If it feels ok then you should be confident enough to stand by your pricing!”
It took a lot to get to where your small business is today, even if you’re just starting out, so educate yourself with the most up to date pricing that is offered in your field and don’t be afraid to create a pricing strategy that reflects the value of your skill set and knowledge.
When assigning a price to your strengths, also be aware of your weaknesses. According to Dileep Rao on AmEx Open Forum, if you’re in an emerging industry, you have to be incredibly mindful of pricing and be ready to pivot quickly due to rapid, sudden changes. In order to carve out your more permanent niche in a market, focus on one specific thing and do it well, instead of trying to mimic what you have already seen done. Perception pricing is also something to consider, says Rao. If you grossly undervalue your good or service compared to comparable small businesses, the perception of your would-be consumers can be that your actual value is also considerably lower.
Stand your ground
While the trend for bigger companies is to undersell one another just to get the sale, small businesses hold the honorable distinction of providing a more personal experience, though that sometimes comes with a higher price tag. Don’t be tempted to compete with corporate prices and believe in the value you provide for your price. When a customer walks into a small business or hits the landing page of an online store, he or she is often looking for a particular good or service, not trying to find bargain basement prices. This works in the small business owner’s favor because pricing isn’t necessarily the first thing a consumer thinks of when targeting a small business. They have a need that must be met and they would like to find the best option to fulfill on that need. And they’ve come to your business. Erin Weber Vaughn, owner of Erin’s Lunchbox, reminds small business owners to, “…charge for the work you can't take while working for this client or if you are "selling" a day off then really be aware of the true value of that time. If it's the ideal client whatever you charge is perfect, so make yourself happy.”
Offer multiple price points
If a potential customer wants to haggle or under value your service, don’t engage. Stand firm on your pricing, as it reflects your years of experience, and that has value. However, as part of your pricing strategy, consider changing your pricing structure and offering a variety of packages, especially in the service providing sector. If a potential customer wants a good or service that is out of his or her price range, have viable offers that can meet their needs but are less inclusive. By scaling back the offerings and the price, you’re much likelier to have a happy customer on your hands.
Offer tiered pricing
If you’ve ever been to a local coffee shop, you’ve likely looked at a chalkboard for pricing and offerings. You noticed the prices for beverages change with size, as well as with additions, like an extra espresso shot, added flavor or a non-dairy milk. It is very apparent how much your beverage will cost, based on the amount of additions you have. Consider offering this a la carte style pricing in your small business to truly meet the needs of your customers while maintaining agreeable pricing.
Never underestimate the need for quality
In a time when goods aren’t meant to last a lifetime like they once were, people crave quality. No one wants to toss a vacuum cleaner after two years or replace furniture every four years, but often times they must, and as a small business owner, you can’t underestimate consumers’ desire for quality goods or services. Weber Vaughn knows that pricing is tricky but customers are willing to pay for what they truly want. Her business is founded on providing her customers the most "real" and high-quality foods to sustain their health and wellness.
“Never underestimate people's willingness to pay for quality. Own it.”
While not implying that money is no object, it is important to emphasize that when a consumer recognizes a quality product or service that meets their needs, they are far more likely to stick around, even if it isn't what they deem "a bargain." Kristen Kalp, founder and owner of Brand Camp, captures the battle of pricing quality goods perfectly:
“When you're afraid to say your prices out loud, you're pretty close to the appropriate price for them. Especially if you're an artist, if your work is handmade, or if it's close to your heart. Unless you're hawking flipflops on the closest beach corner for a teeny tiny (but steady) profit, you're probably undervaluing the work you do. Unfortunately: when you start to value your work more, you're going to have to hustle it more. The people who buy your stuff just because it's the cheapest will leave you, so you'll have to start making your true fans. It's a terrifying, enriching, growth-inducing process, pricing.”
Be smart and realistic
Denise O’Berry boldly stated that the worst way to price your goods or services is by how much money you want to take home each year. She says that many people fail to see just how much overhead costs add up, time is actually spent in the business and how expenses add up. Follow her five tips in setting up the most effective pricing strategy for your small business:
The Key to Perfect Pricing
It can take a lot of testing and tweaking to get to just the right price point. But you can get started on the right foot by including the following five variables when setting your prices initially:
1. Actual cost. Whether you’re selling products or services, there are back-end costs that must be factored into your price. Be sure to include materials, labor, federal and state tax payments, and company overhead in your Your actual cost.
2. Profit margin. You’ll need to determine what profit margin will work best for you; express it in a percentage, such as 10 percent. Add this amount to your actual cost.
3. Target market. Knowing who your target market is and what price point they'll bear is critically important when setting your prices. For instance, it’s possible to set a price that's much higher than your initial estimates if you’re working with a higher-end market.
4. Competitor pricing. Every business has competitors. Finding one that offers products or services that are similar to yours and determining where they are on the price scale can help you decide what prices you'll set.
5. Your value add. This factor might be the toughest to develop, but it's the one component that can make the most difference in your pricing strategy. You need to determine what it is about doing business with your company that makes the real difference for your clients or customers. If you’re not sure, take a look at your customer testimonials or simply ask your customers why they do business with you. Remember, pricing is often about emotion, so the perception of your value from the customer’s perspective is a big contributing factor in your success or failure.
By considering the important factors that influence pricing, you'll have a strong understanding of market value and your small business' value, which will allow you to create a solid pricing strategy. It will allow you to conduct business more confidently and effectively. Are you in search of other small business education to help your small business succeed?