What should I charge? A common question for many small business owners. Charge too little and profit suffers, charge too much and sales decline. When it comes to pricing your products or services, there is no right or wrong answer. But, your long-term growth and profit will ultimately reflect the decisions you make. So here are some mistakes to avoid AND things you should consider to maximize your bottom line.
Let's start first with the common mistakes small business owners make when it comes to pricing:
Lack of controls on discounting. Discounts and special offers may have their place, but if used as a standard closing tool, it costs you a lot of profit. Have a strategy and purpose when it comes to offering discounts.
- Cost-plus pricing. Setting your prices based on a standard mark-up and cost ignores key elements like value and competition. Some products or services end up over-priced; but more often in small businesses, many are under-priced - leaving profit on the table. Know your costs and have a profit margin goal - but raise or lower your selling price based on competition and value.
- Inadequate systems for tracking competition. You need a method to periodically check what competitors are doing in terms of price, value and products or services. Google alerts and other on-line services can make this easier to monitor.
- Poor execution on price changes or increases. Changing prices is part of doing business. But how you communicate and implement the changes can make a big difference in retention and new business.
- Price inconsistencies. While you may operate locally or regionally, your customers have access to information nationally and globally. If the trade-off between price and value is not strong for your products or services, your price may appear unfair or too high. Be aware of all their options and consider this in pricing decisions.
- Incentives based on sales not profit measures. Sales incentives or commissions based on sales versus profit can have a big impact on margins. It tends to encourage discounting and easy sales (lower margin products) - instead of high-margin premium products.
What Should I Charge?
There are a lot of factors that go into your pricing decisions, such as cost, competition, market conditions, quality and other intangibles like service and convenience. So instead of asking what should I charge, start with a much more relevant question: How much do customers value the products, services or other intangibles I offer?
Pricing and Marketing
Pricing is one of the elements of marketing and is related to your product positioning, such as quality, convenience or low cost. But it also affects the other elements such as product features, channel or distribution decisions and promotion. You can't fund these things if your pricing strategies produce little or no gross profit margins. You can, however:
- Limit the low margin products you sell - and promote the heck out of premium or higher margin products or services
- Look for ways to reduce 'product or delivery' costs so more profit falls to the bottom line
- Find alternate, cost effective ways to get your products or services to customers - joint ventures or the web are just a few.
- Identify cost effective ways to add value that customers will pay for - so you can raise prices more than the cost of the value added.
- Differentiate yourself so you stop competing on price
As a key profit lever in your business, don't just throw a price out there and hope for the best. Give it a little thought, do a little research. When done properly, here's three things YOUR pricing should do:
1. Achieve your financial goals and profit objectives. The key here is to have objectives and know your true costs.
2. Fit the realities of the market place. Will customers buy at that price based on value and competition?
3. Support your positioning and other elements of your marketing, such as distribution channels, promotions, and product uniqueness.
By Joan Nowak
Photography by Raisa Kanareva
Joan Nowak is a Small Business Profit Builder, seasoned Business Coach, and creator of the Hybrid Coaching System for small businesses. For additional resources and ideas to grow your small business, visit http://www.HybridBizAdvisors.com. While you are there, join her mailing list to get her monthly eNewsletter and receive a FREE copy of her eBook, Mastering the 7 Elements of Business Success.
Joan Nowak is a Small Business Profit Builder, seasoned Business Coach, and creator of the Hybrid Coaching System for small businesses. For additional resources and ideas to grow your small business, visit http://www.HybridBizAdvisors.com. While you are there, join her mailing list to get her monthly eNewsletter and receive a FREE copy of her eBook, Mastering the 7 Elements of Business Success.
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