Pricing Strategy: Why your small business should stay on top of pricing

As consumers continue to grapple with the squeeze of higher prices, small businesses recognize they need to price products and services in a way that aligns with shoppers' financial goals, while maintaining profitability.

This insight will help small businesses navigate the pricing maze.

The dynamics of pricing

Three interrelated components are necessary for businesses to develop an effective pricing strategy consistent with their overall business objectives and market conditions:

• Marketing: This entails how you position your product to capture attention and drive sales. You might choose to establish it as a premium offering that justifies a higher price point, or you could pivot to a focus on affordability and value for the money.
• Target audience: Accurately identifying your key audience allows you to optimize prices based on that specific segment’s cost sensitivities and willingness to pay. For example, a small business catering to a high-income demographic may be able to command loftier rates, while one targeting budget-conscious consumers might need to offer more value-oriented prices.
• Industry landscape: Analyzing the ecosystem is crucial to gauge your own positioning and identify potential market gaps. If competitors offer similar products or services at lower prices, you’ll either need to similarly adjust your rates or determine how to differentiate your offerings to justify your higher cost, such as emphasizing a unique value proposition or superior quality.

Your blueprint for successfully conducting pricing research

No business wants to inadvertently leave money on the table by pricing products or services too low—however, it’s critical not to create sticker shock in today’s sensitive climate.

The first step to establishing a baseline is conducting a thorough analysis by monitoring the selling channels of similar companies to understand their pricing structure and points of differentiation.

Yet, once you’ve gathered this information, don’t immediately default to pricing your product or service just under theirs, which encourages customers to view you as a “commodity.” Small businesses can rarely compete on price alone, as your larger counterparts likely benefit from economies of scale and/or can achieve a volume play that’s challenging for a smaller business to duplicate.

Instead, identify the value proposition you offer above and beyond price. The best way to determine this is by talking to your customers (or prospects) about what attracts them to your company and gathering their insight on the distinguishing benefits or experiences you offer.

You might find that your origin story, for example, resonates with the target audience; or that they appreciate your satisfaction guarantee, values, exceptional customer service or responsiveness. You can gain this perspective from surveys or by conducting small focus groups, which also offer the benefit of validating the participants’ importance and inspiring their loyalty. Often people are more apt to back an idea or product they’ve helped shape.

Setting prices that make sense for your business

Carefully calibrating prices is vital to helping your business thrive. While it’s often a combination of art and science, there are two basic methods commonly used to set prices.

• Cost-plus pricing: This method involves calculating the total cost of producing or delivering the product or service, including materials, labor and overhead, then adding a markup to the total to generate profit.
• Value-based pricing: With this approach, small businesses determine the perceived value of their product or service from the customer's perspective by assessing its unique benefits, features and value propositions, then setting the price based on the customer's willingness to pay for those advantages.

Remember that pricing can be elastic

Are you getting feedback that your prices are too high? The great news is you can always adjust as needed to hit that sweet spot—where customers come clamoring, and you’re feeling amply compensated.

Successful small businesses regularly assess and update their approach as market conditions change. For example, if you notice sales softening, experiment with different pricing models through targeted discounts or promotions designed to spur trial and encourage referrals. These techniques will serve you better in the long run rather than permanently lowering prices.

While customers might push back on upward swings for established products, introducing premium prices for product launches can help avoid a rate surprise for existing clientele, while setting appropriate expectations for new customers. Because higher prices are often associated with superior quality or innovation, pricing can be a potent lever to establish yourself as a premium provider—as long as your deliverables and service align with resulting expectations of course.

Maintaining your competitive edge through smart pricing

As small businesses aim to adapt to shifting consumer spending habits and adjust to fluctuating market dynamics, regularly evaluating pricing strategies can help boost sales and profit margins to stay ahead of the competition.

Would you like more information on how your small business can thrive in today’s market? Contact an Old National Bank small business banker today.