Growing a business

Grow Your Business with These 3 Pricing Strategies

There’s a time in every small business journey when sales become stagnant or profits begin to dwindle. But, as a savvy small business owner, you know there are methods to rise above. One of the ways you can achieve new revenue growth is by adjusting your pricing strategy

As your business grows and evolves, so should your pricing strategy. Keeping a close eye on your pricing strategy can help keep your profit margins in check, your inventory flowing smoothly, and your customers engaged with your brand. No matter what your goals are for your business, adjusting your pricing strategy can help you meet them. 

Read on to find out which pricing strategies can help drive growth for your business. Adopting a cost-plus, economy, or premium pricing strategy can help you see results right away. 

Why Revisiting Your Pricing Strategies is a Good Idea

Developing an effective pricing strategy is an important part of running a successful business. But there’s rarely a one-size-fits-all solution. Plus, competitive pricing strategies are becoming harder and harder to manage. Several factors that are out of your control make it even more challenging, including: 

  • Inflation 
  • Supply chain constraints
  • Seasonality of demand 
  • Competitive pricing

This is why it’s essential to revisit your pricing strategy on a regular basis, especially if your business growth has hit a plateau. On average, you should analyze your pricing plan every 6 to 9 months—making tweaks and changes as needed. 

Here are three strategies you may want to consider during your next analysis:

1. Cost-Plus Pricing with Fixed Markup 

Developing a pricing strategy from scratch can be incredibly complex—but it doesn’t have to be. A cost-plus pricing strategy is a simple way to determine a selling price for your products in a fair and unbiased manner. 

This strategy takes things like consumer demand, perceived value, and competitor prices out of the equation. It relies instead on factors directly within your control—things like production and labour costs. Cost-plus pricing looks at the total production cost of a single unit and adds a fixed percentage or fixed markup on top. 

 How to calculate cost-plus pricing

The best part of a cost-plus pricing strategy is that you already have all the data you need. There’s no consumer research or competitive analysis required. Your company is likely already tracking the information you need to calculate cost-plus pricing. 

The cost-plus pricing equation looks like this:

([Direct material costs + Direct labour costs + Overhead] / Number of Units)

* (1 + Markup percentage) = Cost-plus price

Let’s break it down: 

  1. Start by determining the total cost of producing a certain number of units. Add together direct material costs, direct labour costs, and overhead costs. 
  2. Divide the sum by the number of units in the production batch. This gives you your cost per unit. 
  3. Decide what you want your markup percentage to be—this is your profit. There are some suggested industry markups, but it’s really up to you and your company. The higher the markup, the higher your profit. Multiply the cost per unit by your selected markup percentage—that’s your cost-plus price per unit. 

How does this pricing strategy help grow your business?

This strategy is straightforward to implement and use. Even without industry know-how, it can be applied by companies of all shapes and sizes to nearly any product. It’s a reliable strategy that consistently covers production costs and generates profit. 

The prices you set using this strategy are easy to justify, and the corresponding increase in production costs can explain price increases. Adopting a cost-plus pricing strategy shows your customers that you’re not interested in price wars, and they won’t be hit with unjustifiable price increases on their favourite products. 

Companies that use cost-plus pricing can be transparent about pricing choices with their customers, building trust in the market and among their clientele. 

 2. Differentiated Premium Pricing

You can take advantage of differentiated premium pricing if your business offers unique products or services with little to no competition. Premium pricing involves pricing products and services above standard market value, making your products and services seem more valuable or prestigious than similar offerings (whether they really are or not). Premium pricing appeals to your buyers’ psyche by making your brand appear more desirable, giving you a major competitive advantage. 

But when it comes to premium pricing, you have to walk the walk. Consumers want to know they’re getting what they pay for. If you’re going to price and market your products at a premium rate, your customers will expect a premium experience. Everything from the packaging to customer service to the look and feel of your store or website should reflect the higher price tag of your offerings. 

Adopting this pricing strategy can be lucrative but doesn’t come without risks. Companies that use premium pricing may risk pricing themselves out of an entire segment of buyers or significantly limiting their target audience.

How does this pricing strategy help grow your business?

Increased profit margins are an obvious advantage of premium pricing. The more you charge for your offerings above market value, the more revenue you bring in per sale. 

Beyond that, a premium pricing strategy can help you raise brand awareness and build a competitive advantage. Customers and competitors alike will view your offerings as prestigious and desirable. Customers will want to buy them, and any potential competitors won’t want to compete with an already premium brand.

3. High-Volume or Economy Pricing 

On the flip side, economy pricing attracts price-conscious customers by pricing products and services very low. Economy pricing involves minimizing marketing and production costs to set the lowest possible sales price and still turn a slight profit. Generic food suppliers and discount retailers often use economy pricing strategies. 

As always, this strategy comes with pros and cons. While the lower-price point attracts more customers and encourages bulk purchases, it can also negatively impact brand perception by making your brand synonymous with “cheap” or low quality. Additionally, you may find it hard to cut production costs while maintaining the value of your products or find new customers with a slashed marketing budget. 

How does this pricing strategy help grow your business?

Economy pricing attracts price-sensitive consumers while keeping customer acquisition costs low—a good thing because this strategy works especially well when a steady (and growing) stream of customers coming through your doors. 

An economy pricing strategy is especially effective when consumers search for budget-friendly buys  during an economic downturn or recession. This strategy keeps your customers’ ability to pay at the forefront, building brand loyalty and competitive advantage. 

Choosing an Effective Strategy

Choosing the right pricing for your products and services is essential to reaching your business goals—whether that’s bringing in more revenue, attracting more customers, or building a brand reputation. 

But your pricing strategy isn’t set in stone. Your business grows and evolves all the time—so should your pricing strategy. It’s a good idea to review your pricing strategy on a regular basis, especially if you notice a drop in revenue or a change in profit margins. Additionally, keeping an eye on your competitors’ pricing can help you keep tabs on the market (and your competitors). 

Reliable accounting software like QuickBooks Advanced makes monitoring relevant sales data at a glance easy. This allows you to evaluate your pricing methods and real-time changes, so you can grow your business confidently. 

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