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Pricing often determines competitiveness in hard-fought market segments. Getting the price of your products and services just right is a balancing act between affordability and profitability.
Business owners also have to consider consumer psychology and people who are price shoppers versus others who are value shoppers.
That balance can be particularly hard to achieve for small businesses operating in saturated market spaces. The challenge is to keep prices low to attract the widest possible customer base while still turning a profit on every sale.
The question is, how do you maintain an optimal balance between the two?
Market research can help but it’s not enough to guide pricing decisions. You’ll need to brainstorm a little harder to find the perfect pricing strategy for small business owners.
A competitive pricing strategy maximizes the value proposition of your products and services at the lowest possible price point.
Think of it like a game plan. One that will help you get new customers, keep away customers who are outside of target market, increase sales, and improve your bottom line.
In this article, we'll explore some of the best pricing strategies for small businesses. We’ll discuss value-based pricing, cost-plus pricing, and competitive pricing strategy, among other techniques to help you decide what works best for you.
What is a pricing strategy for small businesses?
A pricing strategy is a plan that uses models or methods rooted in consumer data and psychology to price your products or services to achieve your business goals. It’s a component of a business’s overall marketing strategy. Pricing your products in keeping with customer pricing expectations is crucial to grow your business at a healthy and sustainable pace.
If your products or services cost too much, you’ll end up pricing out a section of customers who’ll look elsewhere for more affordable options. If they cost too little, on the other hand, it might be difficult for you to make a profit or even meet production costs. A lower-than-expected price might also make your products seem cheap and unreliable.
These are some of the factors you need to keep in mind while coming up with a smart and well-rounded and competitive strategy that lets you create pricing expectations.
The best and most competitive pricing strategy depends on a variety of factors, including:
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Production costs
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Market trends
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Customer behavior
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Brand image
Let’s understand how each of these factors influences pricing strategy.
Production costs
The primary determinant of a competitive pricing strategy is product production cost. It’s the minimum price you need to charge to break even on each product or service. You lose money every time you make a sale if you’re not charging enough to cover your production cost. And that's no way to run a business!
The only instance where you can charge less than the production cost is when a product or service is tied to a larger offering (as a special deal or add-on) with a higher margin to make up for the loss.
The dynamics of production cost and pricing are also influenced by the type and quality of the goods or services you’re offering.
For instance, you could be selling handmade soaps that don’t cost a lot to make. In this case, a sufficiently low production cost can allow you to charge a higher sale price and still remain relevant in a competitive market. A high cost of production, on the other hand, gives you a thinner margin of profitability to maintain competitiveness.
Market trends
Think of market trends as ocean tides without predictability.
Demand can sometimes be high and sometimes low in response to macroeconomic conditions, seasonal changes, and geopolitical factors. Small business owners must be particularly quick in adapting to such changes and fluctuations.
Market trends can affect different pricing strategies in different ways. If there's a higher-than-usual demand for a particular product or service, you might be able to charge a higher price and still attract customers. Conversely, if the market is flooded by direct competitors with similar offerings, you might well need to set the lowest price to remain relevant.
The key, here, is to stay on top of market trends. One way of doing that is by keeping a close eye on industry news and developments. Are there new players entering the market? Is there a shift in consumer preferences, behaviors, or customer loyalty?
Keeping abreast of developments like these can help you anticipate shifts in demand and adjust your pricing strategy accordingly.
Market research is another way of gaining insights into shifts in market trends. Gathering data on the behavior and preferences of your target audience can tell you how they’ll likely respond to your pricing strategy. If you're selling luxury items, for instance, you might find that your target audience is willing to pay premium pricing for exclusivity.
Having an adaptable and flexible pricing strategy is key to leveraging market trends effectively in your pricing strategy and staying true to pricing expectations from customers. Keep your finger on the pulse of your industry and your target audience, and be willing to adjust your pricing method as needed.
Customer behavior
Customer behavior and pricing strategy are closely linked. Understanding customer behavior is critical to developing a psychological pricing strategy that resonates with your audience and motivates them to buy. Let’s understand how!
In an article about the psychology of buying Dale Witenhafer, the founder of Arizona-based carpet cleaning company Clearly Clean, shared that:
"Shoppers are going to be using emotion to make their purchasing decisions. They want someone they can trust. And how do they determine that? They want to see your face. Reputation marketing, like reviews, guarantees and credentials are fantastic (don't get me wrong), but humans make initial judgements by looking at each other. For better or worse, we just do. If you do not put a face to your service business, you are behind in this competition."
At its most basic, understanding customer behavior can tell you how much someone is willing to pay for a given product or service, and why.
If your target audience values quality over quantity, they may be willing to pay a higher price for products made with superior materials or craftsmanship, for instance. If you’re serving price conscious consumers, on the other hand, they could potentially opt for a product that is priced lower even if it means compromising on quality to some extent.
Customer behavior can also influence pricing strategy by determining which of the pricing models works best for your business.
For instance, some customers prefer one-time purchases while others prefer subscription-based models that offer ongoing benefits. An understanding of customer behavior of this kind can help you determine which pricing model leads to higher sales and keeps away wrong customers.
Finally, customer behavior can impact pricing strategy by revealing opportunities for upselling and cross-selling. Having a good enough grasp of your customer’s needs and preferences can help you identify complementary products or services that they may be interested in and adjust your pricing strategy accordingly.
Brand image
Your brand image is shaped market reputation as well as a combination of brand messaging, customer experience, and overall identity. Understanding how these factors impact your business lets you develop a winning pricing strategy closely aligned with the image customers have of your brand.
For example, a brand image built around luxury and exclusivity can mean you’re able to charge higher for your products or services than competitors with mass-market brand images. A brand image of affordability and accessibility, on the other hand, may need you to keep selling prices lower to maintain your market positioning.
Another way that brand image can impact pricing strategy is through the perceived value of your products or services. A strong brand image can lead customers to believe that your products or services are of higher quality and, therefore, justifies a higher price. On the other hand, a weak brand image may lead customers to question the value of your products or services and make them less willing to pay premium prices.
Pricing strategy guide: what are the most popular types of pricing strategies?
Businesses adopt different pricing strategies in response to markets demands. Let's take a closer look at some of the more common pricing strategies and how they can be applied to different types of small businesses. Use the following pricing strategy examples as a pricing strategy guide.
1. Cost-plus pricing
This is one of those pricing models that are easy to calculate. Cost-plus pricing is a simple pricing strategy that involves adding a markup to the cost of producing a product or service to determine the final price.
For example, if the cost of producing a widget is $10 and you want to add a 50% markup, the final price would be $15. This strategy is commonly used in manufacturing and retail industries.
2. Value-based pricing
This strategy involves setting prices based on the perceived value of the product or service in the eyes of the customer.
For instance, even though a business management course doesn’t cost much to record, it provides significant value to budding entrepreneurs. That is why it can be priced at a good $300-$500. This strategy is commonly used in the service and digital product industries.
3. Dynamic pricing
This in an entirely different pricing strategy that involves adjusting prices based on real-time market demand and supply.
For example, ride-sharing apps like Uber and Lyft use dynamic pricing strategy to increase prices during high-demand periods and decrease prices when demand drops. This strategy is commonly used in industries where supply and demand are constantly fluctuating.
4. Penetration pricing
This strategy involves setting prices lower than competitor prices to attract customers and achieve market penetration and market share.
For example, a new restaurant may prices significantly lower than established competitors to attract customers and build brand and customer loyalty. This strategy is commonly used to gain considerable competitive advantage in contested markets.
5. Premium pricing
This strategy involves setting prices higher than competitor prices to create an image of exclusivity and luxury. Luxury car manufacturers like Bentley and Rolls-Royce, for example, utilize a premium pricing strategy to position themselves as high-end brands.
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How to create a competitive pricing strategy for small business (in 7 simple steps)
At NiceJob, we specialize in helping small businesses find their footing in the market and establish a reliable consumer base. That’s because not every pricing strategy is destined for success. Consider us your pricing strategists, ready to guide you through the process.
Here’s how you can craft the perfect pricing strategy for your business in seven easy steps.
1. Know your costs
Start by understanding your production costs, overhead costs, and other fixed and variable costs associated with running your business. This knowledge will form the foundation of a winning pricing strategy, ensuring that you cover your expenses and maximize profits.
2. Research the market
Get up close and personal with your target market. Analyze your competitors' pricing, target customer preferences, and buying behavior. Is there a gap in the market you can exploit? Are your target customers willing to accept premium pricing for unique features or exceptional service? An understanding of such facts will help position your pricing strategy optimally.
3. Determine your value proposition
What makes your products or services stand out? Value based pricing requires you to identify the unique value you offer to customers. Is it unrivaled quality, convenience, or a personalized touch? Your pricing strategy should reflect this value proposition, allowing you to command a price that aligns with the perceived value you bring to the table.
4. Segment your pricing
Not all customers are created equal. Consider segmenting your pricing strategy based on target customer segments or product and service tiers. For example, you could offer a basic package at an affordable and right price for price sensitive customers, while providing premium options with additional features for those willing to pay a higher price.
5. Test and iterate
Don't be afraid to experiment and adjust your winning pricing strategy over time. Test different price points, discounts, or bundling options to gauge customer response. Collect feedback and analyze sales data to fine-tune your pricing strategy and maximize profitability.
6. Monitor the competition
Competitor pricing is all about keep a close eye on your competitor's pricing moves. Are they adjusting their prices or introducing new promotions? Stay agile and be prepared to respond accordingly. Remember, staying competitive doesn't mean undercutting everyone; it's more about delivering value and finding your unique selling proposition.
7. Communicate your pricing with confidence
Once you've established your pricing strategy, communicate it to your customers with conviction. Highlight the value they'll receive and the benefits they'll gain. Show them that your prices are justified and that they'll be making a smart investment by choosing your products or services.
How to know if a pricing strategy is right for you?
The perfect pricing strategy for your business is like Cinderella’s shoe. You might have to try several of them on before you find the one that fits.
Different pricing strategies are required under various market conditions. Once you enforce a strong pricing strategy across your business, keep a close watch over two indicators:
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Customer response
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Revenue
The right pricing policy will keep your customers happy while also producing revenue.
If your current pricing strategy is not giving you the best returns in terms of these two indicators, it may be time to re-evaluate and spend some time understanding your market better. You might also have to re-think your pricing policies in the event of an economic downturn or recession, or something else that affects global markets.
Your ultimate goal should be to retain as many customers as possible by catering to their needs to the best of your abilities.
Reach more customers using reputation marketing
We hope this article has helped you figure out a workable and winning pricing strategy for your business. Once you have a reliable strategy in place, you’ll need to market your business locally to attract the right customers.
If you’re looking to market your local business better and improve your brand image, consider using NiceJob. Our reputation marketing platform helps you get more reviews, referrals, and sales while setting your business up for long-term success.
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