The success of your small business may depend, in part, on how you price your products or services. It's not the only factor, but it's a major one. Your pricing should cover your operating costs, provide your business with a decent profit, and still manage to get customers in the door. Following are six pricing tips for your small business to consider.
1. Have a Good Understanding of Your Costs
When figuring out a price, it's important to have a good understanding of your own costs. There are both variable and fixed costs, and both are important to consider. Fixed costs are those that don't change based on output. These include salaries, insurance, rent, etc. Variable costs are those that do change based on production volume, such as labor, materials, shipping, etc. Add up your fixed and variable costs to figure out the total costs, so you have a starting point. Your pricing will obviously need to factor in your costs with room to generate profit.
2. Know the Competition
Research your competitors' prices and value propositions. Look at their strengths and weaknesses, as well as things like discount strategies, pricing tiers, and what their customers are saying. Try to figure out where you can offer more value and address needs that they are missing. While customers may be drawn to lower prices, it may be wise to avoid a pricing war. Small businesses may lose in these scenarios to larger, more established businesses with more resources.
3. Know Your Target Market
It can be helpful to have a good understanding of your target market. Figure out your demographics and aim to determine how much they're willing to spend on what you offer. Conduct market research. Try surveys, focus groups, and look at customer feedback. Read reviews for businesses offering similar products or services.
4. Consider Wholesale and Retail
"Calculate all costs in both manufacturing the product and selling it," says Rhett Buttle at Forbes.* "Through this process, it is important to clarify how you will sell your product. For example, if you plan to sell through retailers, you’ll need to budget for commissions. When approaching retailers, your selling price is the wholesale value. Retailers resell products, so it’s important you don’t compete with your partners when setting your retail price. Consider the pricing model of wholesale price = total cost x 2 and retail price = wholesale price x 2.5. For example, if your total cost is $40, your wholesale price is $80 and your retail price is $200."
5. Consider a Subscription Model
"Making consistent sales is the key to long-term business success," says Nicholas Leighton at Entrepreneur.** "If you have a product that requires being sold over and over, you might be able to introduce some form of recurring or subscription pricing. This not only helps keep revenue flowing into your business, but it provides long-range visibility into your anticipated revenue. This is helpful for both strategic planning and securing better financing through investors or a bank line of credit."
6. Consult Your Bank
Your bank can help you figure out how to price your offerings through a variety of tools and services. Treasury management tools can help you optimize your cash flow, which can factor into pricing. Merchant services can provide data on sales patterns that can help you adjust. Business loans and lines of credit can help you manage risks associated with trying different pricing models.
A solid pricing strategy can go a long way toward providing your business with long-term, sustainable success and growth. Know your costs, your competition, and your target market. Experiment with different models to find one that works well. Get as much information and data as possible. Analyze data and consult your bank for additional insights and tools that can help you optimize not only your pricing, but your business as a whole.
