Breaking down pricing for small business goods and services.
You can then choose to charge a premium price (if you have a superior, value-added product or service), a discount price (which is generally hard for small companies to sustain), or a price similar to the competition’s (market price).
Here are five other pricing considerations:
You may need to vary prices depending on your sales channel.
For example, if you sell directly to consumers as well as to retailers/resellers, you’ll have to charge the retailers less so they can charge the same retail price you do and still make a profit. If you’re selling to businesses, consider the type of business and price accordingly.
Small businesses have lower budgets, while big corporations have more to spend, or vice versa.
2. Markup on cost:
Some companies calculate pricing based on a markup on their cost to produce the product or service. Your market research should show you average markups for your industry.
“Bundling” means charge lower prices when customers buy more than one product or service. For instance, if you offer website design, Web hosting and e-mail marketing services, you might charge less when customers sign up for all three of your services.
4. Target market:
Consider your target market in setting prices.
For example, if your target market is a sophisticated buyer, then you will probably need to include some costs (reflected in the price) to deal with a higher level of customer service than other customers.
5. Promotional pricing:
Many businesses offer sales or promotional prices to entice new customers or to encourage customers to buy more.
Setting and Adjusting Prices
Pricing isn’t a one-time task, but an ongoing effort.
As your new business gets off the ground, you’ll probably have to tinker with your prices until you find the right formula that increases both sales and profits. You’ll also need to adjust prices as market conditions change and as your business grows.
Here are the steps to follow at each stage of the game:
Setting a price:
- Consider the costs of making your product or providing your service, plus profit.
- Know the competition’s price and whether you will match it, beat it or charge more.
Adjust the price as needed:
- Monitor customer demand. Is your product or service selling? If not, rethink your pricing.
- Compare your sales to the competition. Are your sales similar to, better than or worse than theirs?
- Ensure you’re providing value commensurate with your price.
- Consider using credit terms or bundling products/services to make your offerings more attractive.
- Before increasing prices, look for ways to reduce your costs.
Next- Why are cost ratios are important? What are they? 3 benchmarks
About the author
Marjorie Weber has been educating entrepreneurs and guiding them in their search for capital for the past 16 years: combining business training programs with one-on-one mentoring. Marj is currently a financial advisor for Florida SBDC at FIU. She was Chair of SCORE Miami Dade from 2010 to 2014. She also serves as an advisor to the Goldman Sachs 10,000 Small Business Program and the SBA Emerging Leaders Program and provides training for Veterans seeking an entrepreneurial path upon retirement from the service. She has been facilitating workshops under the auspices of Miami Bayside Foundation for the past 3 years. She commenced her career as a real estate investment banker in New York and Miami.She uses these long term relationships to assist her clients in accessing capital. She knows both the process and the people and has assisted in providing financing for hundreds of businesses in Miami Dade.