How to develop a pricing strategy for your small business
Choosing the right pricing strategy for your business can be the difference between success or failure.
Deciding what to charge for your product or service can be tricky. When you’re making this choice, there are a few things to factor in.
What is a pricing strategy?
Firstly, you need to ensure that you get more money out of a sale than how much it cost you to make that sale. In business terms, we say you need to know the ‘cost of goods sold’ or ‘cost of sales’.
For example, if you have an ice cream store – you need to factor how much it costs to buy the cone, the ice cream and the delivery. You also need to factor in the electricity costs for keeping your product frozen, and the costs for the store or truck you’re selling it from. Plus – the cost of your staff if you’re hiring someone to sell it.
For a service, your overheads may look a bit different. They may include the cost of an office space you’re renting, plus the fee for any programs or services you sign up for to help your business run smoothly. In this case, the cost of goods will include your expertise and the time it takes you to complete the service.
Whether you have a product or a service, it’s also a great time to refer back to your competitor analysis to look at how much your competitors charge. If you want to position yourself as a more cost-friendly alternative, try and beat their prices. If you’re positioning your brand as a luxury or exclusive item, you can consider a higher price point.
Types of pricing strategies for small businesses
Once you have determined your cost of sales, there are a number of different pricing strategies to consider. Some of the most common ones include:
- Competitive pricing: Setting your price based entirely on what your competitors are doing.
- Cost-plus pricing: Adding a flat rate or percentage markup to the cost of each sale.
- Penetration pricing: Setting your price low initially to establish interest and a client base/word-of-mouth marketing, and raise it later. This is popular for small businesses entering a highly competitive market.
- Price skimming: The opposite to the above; setting the price high initially and then lowering it to stay competitive as more businesses enter the market. A popular tactic for small businesses in a niche market with high-value goods.
- Value-based pricing: Basing your price on the perceived or estimated value of a product or service
“Once you have determined your cost of sales, there are a number of different pricing strategies to consider”
Adjust your strategy as you see fit
Choosing the right method for you will depend on what product or service you’re selling, which industry you’re in and who your target market is. It’s also possible to combine elements from some of these strategies, such as the competitive and the penetration pricing.
Doing your research and knowing your cost of sales is the first point of call. If you establish strong foundations early on, you’ll have the best chance of success.
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