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Pricing strategies for small businesses

By Intuit Australia

3 min read

One of the most important decisions you’ll make is pricing your products or services. Here are the pricing strategies you need to know.

Business experts believe pricing is one of the most important decisions you will be called upon to make. Many business owners earn far less than they could, or even operate at a loss, because of their pricing strategies. So, how do you get it right?

“You need to look at pricing from three angles,” says Julia Bickerstaff, founder of The Business Bakery, a small business consultancy that helps entrepreneurs make a healthy income from their businesses. “Then it is about styles and ways of communicating the price.”

Step 1: figure out your costs

Start by analysing the cost of production or cost of service, says Bickerstaff. Many business owners and managers are not fully aware of what it takes to simply cover costs, and they price too low in order to offer a better price than their competitors.

The price of a product is not simply the cost of the item plus your profit you need to be able to cover all the elements that go into running your business. In addition to manufacturing costs and delivery, remember to account for business essentials such as maintaining a website; rent for your workshop or office; equipment and stationery; licences and registrations; record-keeping and financial management obligations; plus a salary (and super) for yourself and any employees.

Step 2: know your competitors

The second step is to look at what your competitors are charging. However, don’t only look at their prices. “What is more important at this stage is to figure out whether your offering is better or worse, of higher or lower quality than your competitors,” explains Bickerstaff.

So, if your location is handier, if your website offers faster shipping, if your advice or after-sales service is of a higher quality, or if your packaging or presentation is classier, include this in your analysis, too.

Check out 10 to 20 businesses in your market and in related markets (for example, if you sell ice-cream, then also check out businesses that sell frozen yoghurt and custard) and rate your business’s offering against theirs to figure out whether your products or services should be priced higher or lower than your competitors.

Step 3: know your customers

“Finally, you need to think about what customers will pay for what you are offering,” says Bickerstaff. “Many business managers think customers will not buy their product if it is more expensive. But customers are typically not looking at your prices with a microscope. If they want cheap, they will go to a big retailer. If they come to a small business, they’re looking for the right thing, not the cheap thing.”

When analysing what your customers will pay, figure out what they pay for other unrelated services or items. Using the ice-cream product as an example again, if your typical customer spends $400 a month at the hairdresser, then a difference of a few dollars for ice-cream is not likely to worry them.

Create a price range

“After going through these steps, come up with a band of pricing and begin to experiment within that band,” says Bickerstaff. “It is best to start at the high end and come down, rather than starting cheaper. And if it doesn’t sell at any price, you need to have a good look at what you are offering and ask why anybody would want to buy it.”

Sales strategies: anchoring

Once a price is decided upon, think about how you might communicate it, says Bickerstaff. Develop an understanding of the theory of “anchoring”, or putting a far higher-priced product next to the one you want to sell.

“If I show you a $500 bottle of wine then one for $50, the $50 bottle will seem good value,” she says. “But if you start with a big sign that says ‘Prices from as low as $10′, then I see the $50 bottle, I will never buy it. Always show a higher price first.

“Small businesses can’t be in the bargain business and customers don’t expect them to be. Display your prices boldly and up front. Pricing tells a customer how good the product is. So think of pricing as an enjoyable, positive and powerful thing, because that’s what it is if you get it right.”

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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