Introduction

Pricing can often be the most difficult aspect of running a small business. It requires an understanding of your costs, your customers, and your competitors. But there are a few proven strategies you can use to help decide on the right price for your product or service.

When you are running a small business, it is not always easy to find the time to focus on pricing. But if you do not set prices right, you could end up losing money or even going out of business!

One of the most difficult things for any business owner is deciding on pricing. How do you know if your price is right? Is there a way to make sure that your customers are happy, and that your business can be profitable?

The answer lies in understanding the concept of value. In this article, we will help you understand what value means and how to use it to determine your price. We will also share some proven tactics for determining what people are willing to pay for various goods or services.

Pricing lies at the intersection of product, sales, marketing, and finance. It takes a careful evaluation of your business’s strengths and limitations, as well as an understanding of your customers’ needs, to set a pricing strategy that will maximize profit while keeping customers happy.

How do you set a price for your product?

In determining pricing strategy, companies try to balance the desire to maximize profits with the need to stay competitive in the marketplace. The price of a product or service should be set at a level that will maximize profits over the long term. However, setting prices too high may discourage customers from buying your product or service. If you set your prices too low, then you may not be able to cover all your costs and thus may need to seek additional financing options such as loans or lines of credit (which can have negative consequences).

As a small business owner, you have wondered how to determine the best price for your product. It is a question that can seem overwhelming, especially when you are just starting.

When you are a small business owner, you need to be able to keep an eye on the bottom line. This means setting prices that are fair for both your customers and your business. It is important to do some research before setting prices so you can make sure your prices are fair and reasonable.

3 major pricing methods

To find the ideal price for your product, there are three main strategies: cost-based pricing, competition-based pricing, and value-based pricing. Each strategy has its strengths and weaknesses which we can look out for below

3 major “scientific” criteria businesses use in determining Selling Prices:

Pricing based on Costs, pricing based on competition and pricing based on value.

There are quite a few other factors in the mix, but it mostly boils down to these three in boardrooms.

Most times, it is not one or the other, but a mix of strategies to arrive at the right price.

Pricing based on Costs

Cost-based pricing is a straightforward way to set your price. In this method, you add a percentage of profit to the cost of producing the product. For example, if it costs you $100 to produce one unit of your product then your price would be $110 if you set your mark-up at 10%.

You determine what it costs to produce and sell a product or service. Next, set the price at a level that covers those costs and leaves room for profit. This is the easiest strategy for small businesses because it does not require much market research or analysis.

Cost-based pricing gives you a starting point for determining an appropriate price for your product or service. However, it can also be dangerous if not done correctly. To avoid making costly mistakes with cost-plus pricing, you must:

Know your costs and understand them completely before setting up a budget. You need accurate information about all the costs associated with producing that product. This includes not only labour costs but also materials and other expenses like shipping and storage fees.

What you should know

Without knowing what each step in production entails as well as how much each step will cost (and how much profit), it will be difficult for you to do anything other than guess when setting prices based on calculations like these!

Costs are in two broad categories: fixed costs and variable costs. Fixed costs are those which do not vary with the level of production, while variable costs do. For example, rent is a fixed cost, while labour is a variable cost.

Note

Cost-based pricing involves adding a markup to the cost of goods sold. This strategy works well for companies whose products are simple and have low costs associated with them. However, this method may not be appropriate if your product requires significant research and development or if you are manufacturing in limited runs or custom quantities—you will need better ways to price your offerings than this one!

Also, the cost is one of many factors that go into determining a product or service’s price. But cost does not tell you everything about what will make people want to pay for something.

Pricing based on Competition

In competitive pricing, you analyze your competitors’ prices to see where they are charging customers and how much profit they are making from those charges. You then set your prices accordingly so that yours are just below or above theirs—but not by too much!

The first step in this approach is to identify your competitors, understand their business model and identify the market they are targeting. You need to know what they are charging, and how they are positioning themselves. If you can find out what their target market is, you can then decide whether your target market overlaps with theirs. If it does, their customers might want your product as well.

The next step is to benchmark your competitor’s price against what you think it should be. Then you can adjust, if necessary, based on factors like cost differences or potential risk.

This strategy helps ensure that customers will buy from you instead of someone else. But it does require extensive market research and analysis.

What you should consider

The most important part of a pricing strategy is to make sure you are not overpricing your product. You must consider the competition and make sure your prices are competitive with theirs.

One way you can do this is by looking at your competitors’ prices and seeing what they charge for comparable products or services. If you are selling a similar product or service, then chances are they are going to be charging a similar amount.

The best way to avoid being too expensive is by finding out what people are willing to pay for what they are getting. Next, make sure that it is close enough to their expectations. This gives the feeling that they got a good deal when they buy from you instead of just another company offering comparable products or services at more expensive rates than yours.

Note

Competition-based pricing uses competitor prices as benchmarks when setting your prices. For example, “We charge $50 per hour because our competitors do”. While this might sound like an upside-down way of doing things, it can be quite effective given that most people do not want their services priced higher than those offered by other businesses in their area (or elsewhere).

Pricing based on Value

In premium pricing, you charge significantly more than your competitors do for the same product or service. This is because what you provide is more valuable to consumers than the competition.

The Value-Based Pricing Strategy is a premium price strategy where you charge more than your competitors for a similar product or service. The goal of this pricing strategy is to increase the perceived value of your product or service in the eyes of your customers. This will make them more likely to buy from you instead of your competitors.

Value-based pricing is the most popular approach to setting prices for small businesses, and it is easy to see why. Instead of focusing on what a customer will pay, you focus on how much value they get out of your product or service. This method works well for products or services with unique custom features. Value-based pricing also works well for products or services that have a high perceived value.

How do you implement this strategy?

The first step is to determine what makes your brand, product, or service unique. Then identify how you can use those qualities to differentiate yourself from other brands, products, and services in your category. For example, if you are selling a meal delivery service, then you might want to emphasize how much healthier it is than other meal delivery services by highlighting ingredients that are organic and locally sourced.

If you cannot differentiate yourself from other brands in your category, then consider changing what category you belong to or just charge the same price as the competition.

Note

Value-based pricing involves determining what value customers will receive from using/buying what you offer before deciding how much money should go into creating that value for them as well as how much profit margin should be added on top of all these costs so that there’s still some leftover after paying all expenses associated with developing whatever product/service etc., which means less time spent worrying about how much each item costs individually instead focusing more closely on creating quality goods & services overall.

Scenario

The total cost to market your product is N100/item. Based on that, you anticipate a 20% markup and then the selling price is N120.

It turns out the competition is selling related products in the market for N100 as well. You cannot sell at (or below) N100, or you will not be making money at all.

You could decide to look critically at your costs and determine what needs to reduce for you to sell at N100/item or, you could decide that your product is a premium one and the costs cannot be below N100 so N120 is fair for those who appreciate the value.

Most businesses take approach one as a minimum and work from there.

How do you arrive at your Sales price? Market-driven or Internal decision making? Or both?

Conclusion

Once they have identified their target market and estimated how much money they need to increase or decrease sales, small business owners will decide on a pricing strategy that works for them. The three most common strategies are cost-plus, value-based, and competitor-based pricing. Small businesses looking to increase revenue, turn a profit and avoid price wars should choose the pricing strategy that best suits their product.

When it comes to setting a price for your services, there are a few strategies that can be employed by smaller companies. Aligning them to the business goals is particularly important. You can use pricing to determine the type of company you are going to be. E.g a premium provider or a regular company.

You can also use pricing to boost cash flow via customer loyalty, or simply to reward customers who have stuck with you.

Pricing is a means to break into the market or introduce a new offer.

As you can see, pricing is a difficult decision to make and one that requires careful consideration. The success or failure of your business depends on it! The key is to find a balance between what customers want, the costs it takes to produce your product and the value they place on what they receive. If you are struggling with this decision, we recommend reaching out to us for a free 15-minute consultation.