The reality is, there’s often a lack of understanding of the external (market-based) and internal (organization-based) factors that determine pricing. Lucky for you, we’ve included an overview below.

Internal Factors: There are several organization-based factors that impact pricing. These can be broadly classified as strategy-based and cost-based.

Strategy-Based Factors

Most small businesses do not have a well laid out strategy, so it is essential to spend some time finalizing your Vision (guiding principle) and Mission (the main purpose of being in business). These essential elements are the starting point of your strategy, on which pricing is heavily dependent. Here are 3 key aspects you should know about:

1. Business Objective: If your business objective is to gain market share with a new product, then you may want to price lower than the competition to win over prospective customers. If your business objective is to maximize profits with every sale, even if it means selling at a lower volume, then you would set prices higher.
2. Target Client Segments: Your target client segments and their capacity to pay are also key determinants of price.
3. Product Positioning/Image: A good pricing model requires careful consideration of the image you want to convey to customers. Are you dealing with commodities or premium goods? Premium positioning should be accompanied by premium pricing. Even if you can`t position your product at the highest premium, you need to differentiate your offering from that of your competitors.

Cost-Based Factors

While it is ambitious to aim for premium pricing for your products, small businesses often struggle to convince clients to pay more for their services. A good starting point for pricing is to take cost-based factors into consideration and start off with a cost-plus margin model. Once your business is established, you can bring out value-added versions at premium prices. Here is a list of costs that should be considered while arriving at your price:

1. Production Cost: It is critical to know what it costs for you to manufacture/source your product. You should also be able to work out which of these costs are fixed and which are variable. For example, if a high proportion of your costs are fixed, then you may not have much flexibility to reduce prices and boost sales. On the other hand, if your production cost falls significantly with volume, then pricing lower will allow you to increase sales while still generating profit.
2. Channels of Distribution Costs: Over and above production costs, you will have distribution channel costs. For example, if you have a physical store as well as a website through which you sell your products, then the costs involved in both cases would be different, and this would need to be factored into the pricing decision.
3. Sales & Marketing Costs: Sales and marketing costs also affect pricing. These expenditures vary depending on the geography, channel and customer base that you are handling. It may be more cost-effective to sell to an existing customer than to a new one. That is why most savvy businesses offer discounts to loyal customers. They are essentially passing on the savings in sales and marketing costs to the buyer.

External Factors: Two key external factors that influence pricing are competition and the business’s operating geography.

Competition

What is the competition up to? It’s important to look into how your competitors are doing business, as this will most certainly influence your pricing strategy. You’ll want to do market research to identify the competition and what they are charging. You can even put on your best cloak and dagger routine and mystery shop! Go to their stores, visit their websites, and gather vital intel into their sales processes. The more you know about what competitors are showcasing, the better you can fine-tune how to differentiate your offering, and price your products and services to sell.

Geography

The area that you are operating in will also influence how you price. Labor and related costs, customer affluence, and the presence of competition vary with geography. So, get a handle on your area’s demographics, and figure out how your pricing strategy will reflect those nuances.

Small business owners don’t always realize how significantly pricing strategy affects cash flow. Nevertheless, it is important to appreciate the price-volume trade off and its subsequent impact on business financials. Businesses need to integrate their pricing approach into their financial model, and do sufficient analysis to gauge the consequences of any pricing decision before implementing it.

In our next post, we’ll break down how to arrive at the right price for your product or service through an easy 7-step process.

The post Small Business Pricing to Win, Part 2: Factors that determine pricing appeared first on Specialty Answering Service.

Pricing impacts, and is impacted by, every business activity from hiring to sales. Economic theory says that supply and demand define price, but what do economists know anyway? Whatever is going on in the market, businesses that work hard to make their products and services more attractive to consumers will increase demand, and in turn, command a premium price tag.

Despite its importance in business success, many small business owners struggle to price their products right. In fact, this topic is so ginormous that even the basics can’t be covered in a single post. So, we’ll be looking at pricing strategies for small businesses as a 4-part series where we’ll be reviewing everything from pricing strategies to external vs. internal factors to common mistakes.

In Part 1 of the series, we’ll discuss the ideal use case and the pitfalls of the 5 most popular pricing strategies for small businesses: value-based pricing, the lowest-price model, the cost-plus model, pay what you want, and dynamic pricing.

#1: Value-Based Pricing

This strategy is based on the question, “How much is the customer willing to pay?” Value-based pricing is a customer-centric approach and often allows you to charge much higher prices by showcasing the value that your product or service brings to the table. One of the biggest advantages of this strategy is that you will be able to enhance your gross margins significantly.

Ideal for: Situations where the value for customers is much higher than the cost of production. This is not suitable for commodity products or services.

Pitfalls: Unless you know exactly what the customer is willing to pay, or the cost of available alternatives, pricing will never be perfect.

#2: Lowest-Price Model

It’s pretty self-explanatory. You offer the price that is the lowest in the market. The advantage here is that pricing is very clear, and you can attract price-sensitive consumers.

Ideal for: Commodities, or if you have substantial cost advantages over your competition.

Pitfalls: Typically, the lowest price model is not suitable for small businesses. It can negatively impact the perception of quality and lead to pricing wars with competitors. Not only that, but for the uber price-conscious, you can bet they’ll switch as soon as they find something cheaper.

#3: Cost-Plus Model

In this model, you determine the total cost of producing, distributing, and selling your product. This is the break-even point where there is no profit or loss. Then, based on your targeted profit, a markup is added to the price. For example, if the break-even point is $5 (cost) and you need a 20% margin ($1), then you price the product at $6.

Ideal for: Determining the rack rate over which discounts and offers can be provided.

Pitfalls: Most small businesses do not consider all costs involved while arriving at the break-even price. And if your pricing is too high and you cannot justify value, then customers may not be willing to pay what you are charging, especially if the competition is offering a lower price.

#4: Pay What You Want

The basic premise here is similar to value-based pricing, except now the customer has control over how much they want to pay you for your offering. In some cases, a floor price may be set as guidance for the buyer. This model was not popular earlier, but is now becoming more and more common. As the Internet allows for faster price discovery, customers are able to readily see how much your competition charges for similar services and what other buyers are paying.

Ideal for: Social or charitable enterprises that appeal to the conscience of the buyer.

Pitfalls: This is not suitable for a Business-to-Business sales model where the buyer has a specific budget earmarked for purchase.

#5: Dynamic Pricing

This is a flexible pricing mechanism where the pricing varies with some factor such as time or demand. When demand peaks, the price also increases. In order to effectively implement dynamic pricing, you should have near real-time data available for whatever you are selling. If your offering is in a price-sensitive market, you need to constantly monitor competitors’ pricing and adjust your numbers accordingly. A variation of dynamic pricing is price discrimination, where the same product is charged differently for different customer segments, e.g. based on geography, age, etc.

Ideal for: Situations where your inventory is perishable, e.g. airline or theater tickets; Internet-based sales where traffic data can be easily monitored and measured.

Pitfalls: In a dynamic pricing scenario, customers are likely to postpone purchasing to wait for a better deal.

If the Top 5 Strategies Don’t Work, How About 7 Others?

The top 5 strategies will generally fit for most small businesses, but if none of the options above seem appropriate for your needs, read on. These pricing methods focus exclusively on winning market share:

• Decoy Pricing: The price of one product is kept high to boost the sales of the lower priced product.
• Loss-Leader Pricing: One product is sold at a loss in order to win the customer and boost sales of other products.
• Penetration Pricing: You set the price low in order to garner market share, and then raise prices later.

And that’s not all! There are pricing models such as:

• Relationship Pricing: Businesses use long-term contracts and price bundling (combining products or services to increase value) that are perceived as beneficial to consumers. Thus, they are encouraged to maintain lasting business relationships.
• Psychological Pricing: Prices are listed as slightly below their cost, which looks better to consumers and maximizes revenue, e.g. pricing something as $4.99 instead of $5, or $99 instead of $100.
• Freemium: Consumers get basic features at no cost and can access advanced features, products or services for a fee.

And who could forget:

• Skimming: Usually used at the launch of a new product or after it has exhausted its usefulness, skimming targets consumers who are willing to pay a premium and helps companies gain market share.

So how do you decide which will work best for your business? There is no really good answer here. The bottom line is, it takes time and research to get it right. But if you decide on things willy-nilly and you get it wrong, it could prove to be a costly mistake, or worse yet, the end of your small business. Don’t let that happen to you!

In our next post, we’ll look at factors that determine pricing, including internal factors such as strategy-based and cost-based factors, and external factors such as competition and geography. Stay tuned!

The post Small Business Pricing to Win, Part 1: What’s your strategy? appeared first on Specialty Answering Service.