In general, small businesses tend to under-price their products and services – or they price haphazardly. By not pricing effectively, this effects their profits, reduces the available capital for future growth and sometimes risks business survival. One of the fastest ways for small businesses to dramatically improve profitability is to stop this and instead implement a pricing policy that gets the profit margin up.

Sometimes there is a fear of competition and if pricing is too high customers will move in droves.  This may happen, but it is rare as most of your Clients do not stay with you based on price they stay for a lot of reasons.

A critical factor in building a successful business is having a sound strategy, products, and services that are differentiated from competitors. What I mean is different in a way that really appeals to customers. If a business has a truly differentiated product they can charge a higher price for it. Too often, small business has a very similar product, similar servicing, they market the same and the in-store experience is the same i.e. nothing that differentiates them.  This does make it hard to price as high as the competition because if all things are equal, customers will trade on the best price.  Every time.

By far the biggest reason small businesses do not charge enough for their products and services is out of fear. Fear that Clients will leave as soon as I increase my prices. Often this means not even keeping up with inflation – or passing on increased supplier costs.

When the cost of the sale goes up (for example, the cost of the product for you to buy), then not passing this increase on is quite irrational. Sometimes this fear may stem from a hesitancy to take risks, more than the economics of the marketplace.

Small business products and services should definitely add value to their customers, but this isn’t about price.  Value could be in convenience, the instore experience, technical knowledge, buying NZ made or connection to the community.  A myriad of reasons that differentiate your product or service.

Simply put, you should charge what the market will bear and maximize overall profit over time.

Doing some mystery shopping on what the competition charges is a good place to start when working out what the market will bear.  Testing pricing helps too. If your market is price sensitive, have one low price for the loss leader product in your range and keep pricing on everything else at a sustainable level.

Lastly, know your cost of sale really well.  Know your market really well.  Know your customers really well. Know how price elastic your product or service is – how far you can stretch the price out versus the value the Clients is getting. In the eyes of your customer, your product or service may be more differentiated than you think.  Price correctly and get that revenue and profit up!

If you are looking for help in these areas, get hold of us at Prime, we can help you format a strategy and process that will get you on the right track.