Where to start 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.
Why are cost ratios are important? What are they?
Benchmarking and financial ratios
Benchmarking means comparing your company’s financial information to the same information from similar companies or to industry norms or ratios. Benchmarking is a great way to test the feasibility of your financial plan.
There are two types of benchmarking.
- Performance benchmarking
Compare performance metrics such as units sold, profit margins or other measurable figures.
- Process benchmarking
Compare processes used by your company to processes of other companies to determine which processes get the best results (“best practices”).
You can use both types of benchmarking for your sales. The ultimate goal is to improve your sales processes and your sales performance by continual comparison.
What are you benchmarking against?
- Your company’s past performance
- Your key competitors or
- Industry leaders.
In general, you want to benchmark your business against top performers in the industry and see where you stand.
Use these tips to competitively position your products and services successfully.