By Bob Bond
ASHEVILLE SCORE COLUMNIST
Determining the proper prices for your small-business products and services is key to your success or failure, and is among the most perplexing issues for new small-business owners. You want to be competitive, particularly in today’s cost-conscious buying environment, but also cover your costs and make a reasonable profit.
Smart pricing strategy begins with understanding the market price — the average charged by all your competitors and the price at which your competitors’ product or service is valued. Then you can choose to charge a premium price if you have a superior value-added product or service, a discount price, or a price in line with the market price.
A common tactic for many startups is to offer discounts early on to lure business. Setting prices too low may seem like a great way to increase sales. But, unrealistically low prices can’t be sustained, and new businesses suffer the most in a price war. Discounting can lower the perceived value of your product or service. And if you underestimate your costs or overestimate your sales volume, you will experience reduced profits or even a loss.
Start by getting a handle on what your business will cost you. You must account for the cost of making your product, as well as overhead costs like rent, advertising, credit card fees, taxes, etc. and adding a fair profit. You may wish to consult the U.S. Small Business Administration’s free guide, Pricing Your Products, which includes worksheets to assist you in accounting for all your costs, as well as offering price-setting criteria.
Pricing is an ongoing effort and not a one-time task. You may need to adjust prices as market conditions change and as your business grows. Before increasing prices, however, look for ways to reduce your costs. Periodically examine your pricing strategy to make sure you’re still in sync with your costs. It’s easy to be caught unawares by hikes for supplies or administrative costs.
Consider and implement price increases judiciously. If an increase in your price is necessary, be proactive about explaining the reasons to your customers. As long as you continue to provide the high level of value they’ve come to expect from your business, most will accept the higher price.
Rather than guessing or simply going by what the competition charges, every small business should develop its own pricing strategy. In addition to accounting for all costs, research the norms for your industry, including price ranges across the country if you sell nationwide. You may want to charge more or less, depending on your brand positioning, but also you should determine how much profit you want to make, and understand the relationship between selling price, profits, and volume of sales needed to achieve the desired profit.
Bob Bond is a SCORE Volunteer Counselor. To learn more about pricing strategies, contact www.ashevillescore.org. Asheville SCORE is a nonprofit organization providing free, confidential business mentoring and training workshops to small business owners.