One of the most important tasks you will have as a small business owner is setting prices for your products or services. Pricing is a critical component of the marketing mix. When your prices are right, they can drive sales, maximize profits, create a preference for your brand, and play a key role in positioning and branding. However, mispricing your products or services can spell disaster for your business and hurt your brand and your bottom line.
There are many different pricing methods for you to choose from, and it is perfectly acceptable to use more than one based on your company’s needs. Once you have established your goals and have outlined your cost structure, it is time to set or revise your prices. There is no magic formula to pricing, but you can start by examining the various approaches and choose the best one for your business. This Balboa Capital blog article looks at five common pricing strategies.
1. Cost-plus pricing.
Cost-plus pricing is one of the easiest and most widely used pricing strategies. With this method, you add a markup percentage to the total amount you spend on materials, production, equipment and employee salaries.
For example, Nicol’s Organic Puppy Treats sells boxes of organic biscuits that require $4.00 for production/ingredients, $1.75 for labor costs, and $1.00 for packaging. The total cost to produce one box is $6.75, and Nicol’s Organic Puppy Treats applies a 40% markup ($2.70) to each box to achieve a product price of $9.45.
2. Bundle pricing.
Signs that say, “Buy one, get one free” or “special offer with purchase” are in retail stores, restaurants, and many other types of businesses across the United States. Offering a discount for purchasing more goods and services is referred to as bundle pricing. It is a popular sales technique because everyone likes to get more for their dollar.
Here is an example of how bundle pricing works. Krystina’s Pizza decided to offer a dinner special for $30 that included one large pizza, one salad, and one dessert. If a customer ordered those items separately, the total cost would be $8 more. Therefore, the bundled price is the better deal, and Krystina’s Pizza was able to generate more business.
3. Discount pricing.
Research shows that 80% of all retail businesses in the United States offer discounted prices at some point during the year. Price markdowns can increase foot traffic to your store and help you move inventory. This is a tremendous benefit if you have a large amount of outdated items in stock, and you need to make room for new items.
An estimated 30% of Americans look forward to sales during the holiday season, and this presents you with an opportunity to make your cash registers ring. If your business is relatively new, you might consider discount pricing to create brand awareness and attract new customers.
4. Value-added pricing.
Effective marketing efforts can alter brand perceptions and help drive sales. For example, if you position your products or services as innovative or exclusive, and support these claims with the right marketing messaging, you might be able to command premium pricing, also referred to as value-added pricing. This takes time and money, but being unique can add value and revenue to your business.
In addition, having a solid brand helps your business remain competitive in any economy, and it minimizes the need to cut prices or take part in “price wars.” Let us use Kev’s Art Shop as an example. It sells limited edition, museum quality prints that are 100% original and signed by the artist. Kev’s Art Shop can command value-added pricing because it offers one-of-a-kind pieces, not the mass-produced pieces that large retailers sell.
5. Competition pricing.
Companies in the business-to-business (B2B) and business-to-consumer (B2C) sectors sell similar products and services, and their prices can vary. You should always monitor your competitors’ prices so you can adjust yours, if needed. Prices can be set above, below, or at the competition.
Next, you have probably seen stores that match advertised prices. This is a good strategy if you do not have time to change the prices on your shelves, or in your point-of-sale system.
Setting the appropriate prices is a balancing act. Many successful small businesses have prices that are not too high, and not too low. If your prices are too high, you will lose potential customers, particularly if competing businesses offer similar products or services for lower prices.
If your prices are too low, two things can happen. First, you might see a big increase in sales volume, which can pose problems if you cannot keep up with demand or cover your expenses. Second, you might not see many sales at all because your products or services are perceived as cheap or do not offer any value.