As a small business, your pricing strategy for selling products or services can have a major impact on your profitability. When all the factors are considered — the costs associated with your products and the value your customers assign to them — you can determine the best pricing for your company.
However, it's an area that many small business owners may struggle to fully understand, especially at the launch of a startup. It takes a lot of market research and work to determine the right pricing strategy for your business, but since it's so integral to your success, it's time well spent.
This article will walk you through common pricing strategies and offer tips on figuring out what may work best for your company.
What Is a Pricing Strategy?
A pricing strategy refers to the processes and methodologies used by a company to determine the best price for its products or services. There's a lot to consider when it comes to determining the amount you should charge: market conditions, competitor prices and actions, profit margins, costs associated with your products or services, customer analysis, and more.
The Importance of Having a Pricing Strategy
Your company's pricing strategy can directly impact your profitability. It can make or break your company's success. Having an effective pricing strategy builds consumer confidence in your company and helps grow your business. It also gives value to your brand and influences whether customers will spend their money with you.
Common Small Business Pricing Strategies
When it comes to pricing strategies, there isn't a "one size fits all." Depending on the industry you're in, the size of your company, what your competitors are doing, and other factors, you might choose from one of these different pricing strategies.
With this pricing strategy, a company determines the price of a product based on all relevant variable costs — overhead, selling and administrative work, labor, materials, etc. The price also includes a markup so there's a profit margin, known as cost-plus pricing. This full-cost pricing methodology is best used on products or services based on specific orders from customers.
When using the price skimming strategy, you'll set your prices as high as you can when you first launch your product or service — skimming the top of your market. Over time, you'll lower the price to reach consumers who were initially priced out. That means you'll have a lot of potential customers over time. This strategy only works with certain products, though, so use it sparingly.
Loss Leader Pricing
With this pricing strategy, a company will undercut the price of one of its products or services to stimulate sales of higher-priced and more profitable items. This is a common practice of many retailers, such as Walmart, that might discount prices of common and essential items like milk and eggs just to get shoppers in the store and browsing other products.
With the freemium pricing method, a basic version of a company's product or service is available for free. This draws in a large number of customers right out of the gate, and a business can charge for additional items or tiers of services. For instance, Canva, a graphic design app, offers its most basic design services for free. Higher-quality images and designs are available for a set price and there are also monthly packages available.
With this pricing model, a company sells a package of their products or services for a lower price than they would each cost if they were purchased separately. Internet companies are a good example of bundling. They often bundle various services in packages for one price.
Economy pricing is directly connected to the volume of items made. By creating a high volume of products, you can keep the cost of production low and, ultimately, sell your products for a lower cost. This pricing strategy is especially useful during times of economic instability.
The penetration pricing strategy is a pricing and marketing strategy that sets a low price — one lower than the eventual price of services or products — at the time of launch. This is a quick way to reach a large customer base at once and also helps spread the word about your brand.
This value pricing tactic assigns a high price to your services or products, one considerably higher than your competition. These higher prices create perceived value, exclusivity, and high-quality, driving interest in your brand.
How to Choose the Right Pricing Strategy for Your Business
Now that you understand some of the most common pricing strategies, how do you determine the right price for your product line? If you offer multiple products or services, you might decide that each one would benefit from a different pricing strategy. You might also select different price points at different times in a product's life cycle. Consider whether you'll offer different prices for e-commerce versus brick-and-mortar spaces.
Here are a few tips to keep in mind as you determine the most competitive pricing strategy and business model for your brand.
Know Your Costs and Break-Even Point
Before setting prices, you need to understand the costs associated with your products or services. These costs can include labor, overhead, materials used, sales, and administration.
When your total revenue equals the total cost of your products or services, that's considered your break-even point. This is one of the most important numbers a business should know before selecting a pricing strategy or marketing their brand, as it goes hand in hand with how much you should be charging. As a small business owner, you should conduct a break-even analysis for all of your products.
Understand Your Customers' Wants and Needs
Ultimately, the cost of your services or products is based on how much value they have to your customers. Understanding your customers' wants and needs will tell you what's most important to them, which features and benefits of your services or products will matter to them the most, and will dictate your pricing.
This means that it's integral to study and research your customers as you price your offerings. Consider conducting surveys or collecting information about them at the point of sale. You can use this information to identify and create consumer segments based on common demographics and characteristics. This information will help you price and market your products and will directly influence your sales.
Understand Your Place in the Marketplace
Where do you stack up against your competitors? Understanding your place in your industry's marketplace should play a role in your pricing strategy. How much are your competitors charging for similar products? How do your products compare?
Your competitors' pricing will directly affect how much you charge for your items. Are you in a place where you can charge as much as your competition? Are you offering a new product to the marketplace? Could you benefit from a lower price compared to similar companies, at least initially? What pricing strategies do other businesses use? Understanding how other businesses in your industry operate will give you a competitive advantage.
Know Your Own Strengths and Weaknesses
When looking at your place in the marketplace, you should also do an in-depth comparison of your products to those of other businesses in the field — and be candid when doing so. What do you do better than your competitors? What do you do worse? How does this affect the value of your services or products? The answers to these questions will determine the ideal pricing for your brand.
Stay on Top of Your Business Finances With Skynova
No matter how you price your products or services, it's important to stay on top of your business finances if you truly want to run a successful company. Skynova's small business platform of accounting and invoicing software and templates streamlines and organizes your bookkeeping process while giving your company a professional look when dealing with clients or customers.
By using a full range of services, you can easily and accurately track all of your business transactions, whether you're sending an invoice, collecting a deposit, generating a receipt, or providing an estimate, among many other activities.
Our customizable templates make it easy for you to generate all of the important documents you need to manage and maintain your company's financial health. This means spending less time on administrative tasks and paperwork and more time focusing on the things that really matter the most: pricing and marketing items and building your brand. Learn more about our all-in-one accounting software and other products.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a pricing and marketing consultant to ensure that you're meeting legal standards and following best practices for your field.