Small business advice: Setting the right price for your product or service
Small business pricing can be a literal minefield to navigate. How much should you charge for your products or services? If you charge too much, you could hurt sales. More dangerous still, charge too little and the long-term sustainability of your small business growth may suffer. Foregoing the very important exercise of properly determining the best price to charge, and opting instead to set your prices low from the get-go will definitely cost you in the long run. And as many companies have already learned the hard way, once pricing hits the market it becomes almost impossible to raise back up again.
When is a price too low?
So when is a price too low? The simple answer can be defined by whether or not the price you’re charging is sustaining your business. This is easy enough to calculate, are you making a profit? Does the price you’re charging cover expenses like material and overhead costs?
There are also psychological aspects to small business pricing that come into play. This not-so-simple answer is defined by a number of factors like your competition, the type of product or service you sell, and your client's frame of mind.
Pricing isn’t just about making a profit; it also says something about your business and how you want to position yourself in the market. Your product’s required level of consideration will also play here, so you should be aware of which category of involvement your product falls into: low-involvement or high-involvement.
Your target customers do hold some sway over your pricing. They shouldn’t necessarily dictate your prices but you should have a decent understanding as to whether your customers are more ruled by budget or convenience. And whether they’re willing to pay a premium for quality or would rather sacrifice it to save a couple of bucks. This will give you a very good indication on the amount of wiggle room you have with regards to your prices and how much resistance you might face when increasing your rates.
Speaking of your customers, unless they’re 100% brand loyal – which very few are – they’re looking at your competition, so you should be too. Are their products similar or comparable to yours? If the answer is yes, then you can use their pricing as your initial benchmark. If the answer is no, then you should think about how you can highlight those differences and monetize them to your advantage.
What are the issues that arise when you are charging too little for your service?
This is pretty self-explanatory. If you price your offerings too low, your bottom line will suffer. Either you won’t have enough profit to fuel your small business growth and invest in new and improved offerings, or you will simply go out of business sooner or later.
The Canadian economy is experiencing a bit of a slow down. We aren’t quite in a recession but we’re not exactly booming either. It may be tempting to lower prices in order to drive up sales volumes from cash-strapped clients. This can have really disastrous long-term effects. As mentioned earlier, there are physiological factors that affect pricing perceptions. More often than not, when it comes to perception - the cheaper the price, the cheaper the quality of the product. So unless, you wish to be seen as the cheapest alternative, avoid pricing your product accordingly.
What are some tips for finding and calculating the right price to charge?
While there are a plethora of small business pricing models for you to choose from, you’re first step should be to answer as many of the following questions as you can:
What kind of product/service are you selling?
- Is it high-involvement or low-involvement?
- Is it unique or exclusive to you or are there substitute products readily available?
- Do you want to be known as luxury or high quality, or are you a lower-cost alternative?
Who are your customers?
- Who are you targeting with this product?
- Are your target customers price-sensitive or price-elastic?
What are your costs?
- What do you expend to make your product or service a reality? Including but not limited to: COGS, salaries, marketing, etc.
- Could you be more cost-efficient?
What’s your revenue target?
- How much of a profit do want your business to make annually?
- How much profit does your individual products or services need to generate to make that a reality?
Who is your competition?
- Who are they?
- How does their product or service stack up against yours in terms of benefits? In terms of quality?
- What are they charging?
Where is the market headed?
- What are the outside factors that may impact demand for your product in the future?
- Are you in a new industry that’s heating up?
- Are you in a well-established or over-saturated industry that’s winding down?
- Are there any upcoming laws or legislation that could impact your business?
Questions like these will help you shape your pricing decisions by forcing you to think of all the factors beyond cost that factor into the equation.
How can you sell clients on a higher price for your service?
As we mentioned earlier, once your small business pricing is fixed you will definitely encounter some resistance when you attempt to raise your rates. Understandably, your customers have grown accustomed to getting your goods for less so why should they pay more now? While this can be a difficult or even uncomfortable prospect, it’s not impossible.
Pricing increases tend to go over better in good economic times but if you’re having issues remaining solvent, there’s really no way around a price increase, and it should be put into effect as soon as possible. Here are a couple of tips on how to raise your prices while still keeping your customers happy.
- Baby Steps – You don’t want to alienate your customers by hiking up your prices all of a sudden – especially given the current state of our less than stellar Canadian economy. Ease them into it. Put together a strategic plan where you increase your prices slowly over a longer period of time, say two to five years. Keep an eye on your sales volumes right after any price changes; they’ll be a good indicator of whether you’ve increased prices too steeply, too quickly.
- Bundle it - You should always be testing new prices, new offers and new combinations of bundles and benefits to help you increase your overall sales. Prices go up from time to time, it’s a fact of life. As the cost of materials and labour goes up, prices will need to reflect that for your business to stay viable. By bundling a price increase with a new offer, you’re increasing the overall perceived value so your customer thinks they’re getting more bang for their buck, even if it is costing more than it used to.
- Be Transparent – Explain in advance that your rates will be going up but counter that with some perceived increase in value. Let them know how you will be serving them better. If you start out low to gain new customers – be clear that this is starter pricing only and will be adjusted after a predetermined amount of time. This let’s your customers feel good about a trial while avoiding the uncomfortable conversation of rising rates.
- Differentiate Yourself – List out all the things that you feel you do better than your competitors. Dig into those points and see if they can be improved upon and used to their full advantage. Do you offer great customer service; is your customer response time better? Do you offer free shipping, custom gift-wrapping, a free consultation, or some other goodies? All these little points add up to an experience that will provide additional value to your customers. More perceived value means a satisfied customer, and satisfied customers will keep coming back time after time, and tend to worry a whole lot less about minor increases in the actual nickels and dimes.
Advice like finding the right price for your product or service is an extension of Evolocity’s commitment to helping small business in Canada succeed. When you’re looking for more small business advice, a small business loan or more information on our other services, contact one of our industry professionals today.