We’ve all heard the lament over giants like Wal-Mart and Amazon pricing small businesses out of business. Even small service businesses aren’t immune from big business competition like Best Buy’s Geek Squad for computer repair or ProFlowers for floral deliveries.
Unless your small business has developed a revolutionary production method or service model, you will likely not be able to compete with the big-guys on price. And the good news is, you really don’t have to. According to a recent inc.com post 10 Reasons Customers Will Pay More, if you can offer your customers an easier buying experience, better customer service, faster delivery, a unique feature, or some other intangible benefit, they are often willing to pay more to purchase from you instead of a competitor.
Of course, figuring out how much more you can charge is the key. While a football fan might be perfectly willing to spend $5 more to get a mailbox in their team colors, most would probably balk at paying $500 more. Similarly, some people would pay a premium for the same technician to work on their computer each time, but might not pay twice as much per hour for that perk. Further, if your product is targeted to ‘the average Joe,’ your potential customer base is large but you will need to be more price sensitive than you would if you offered an exclusive luxury service targeted to the wealthy.
So, how do you find the sweet-spot between good value and too expensive for your products and services?
A recent SCORE feature, What Every Entrepreneur Should Know About Pricing provides helpful advice. Another SCORE tool, the 60-Second Guide to Developing a Pricing Strategy, walks you through the fundamental steps for developing a pricing strategy that attracts and retains customers by making sure that you are not charging too little, or too much.
The most important component of your pricing strategy is making sure that you are actually making money each time you make a sale. After all, if an item costs you $5 to manufacture and you sell it for $7 but fulfilling that order costs you $3, you are not making $2; you are losing $1 on each sale. The Harvard Business School Break-even Analysis Tool provides help with solving this problem, and lets you test pricing scenarios against your fixed and marginal costs in order to find your break-even point. Price changes can also have a significant impact on business that extends beyond the actual purchase price difference. The Harvard Business School Pricing Marginal Math tool enables you to test scenarios and determine how different pricing changes will affect your net profit.
Remember that price is as much of a product or service feature as is color, customer service, or return policy. Understanding your cost is the starting place for any pricing strategy, but understanding your marketplace and your customers is the key to your ongoing success.
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Cheapest thing I’m bought there… by DaMongMan, on Flickr