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Pricing your products and services can be challenging at the best of times – and it’s easy to make mistakes along the way. The good news is that with careful planning, research and the right pricing strategy in place, you could feel more confident with your pricing decisions.
One of the SBDC’s experienced business advisers, Steve McLaren, has seen businesses make some easy-to-avoid mistakes when it comes to pricing, and he has these tips to share.
Mistake #1: Thinking only about cost, not value
According to Steve, it’s important to determine prices that are neither too low or too high. You need to consider the costs for your own business – but there’s much more to it.
“If you set your prices too low, because you’re focussed simply on costs, you could leave money on the table and reduce your profitability,” Steve says. “The consequences of pricing your product too high are also huge. Not only will the cost of sales go up, but your sales cycles will be prolonged, affecting your profits.
Steve recommends finding the right balance by considering the value of your products.
How to avoid this mistake
“Set your prices based on your customers’ perceptions of value. When your customers perceive your products to be of good value, sales go up and your profits thrive.”
“Price increases may be uncomfortable, but it’s an inevitable part of business. Focus more on the value you bring, than the prices you charge. Your customers may realise it’s better to remain a loyal customer than to look elsewhere.”
Mistake #2: Holding the same pricing for too long
Steve often sees business try to leave their prices at the same level for as long as possible. “Business owners fear that if they raise their prices there will be a customer uproar and some of them will leave.”
How to avoid this mistake
“It’s important to habituate customers to frequent, small changes in price. This allows you to make changes to your pricing based on the fluctuations of supplier costs, demand, and other market changes while still maintaining a healthy profit margin.”
“Let’s face it, prices are skyrocketing on almost everything, and some customers simply won’t be able to pay more for your products or services. In this case, you may want to offer options for your loyal customers.”
“For example, to retain customers, perhaps you could let them pay upfront at the current price. They won’t pay more, but you will get payments sooner. Another option is to redirect them to a lower-priced product or service that fits their budget. This is an excellent option for customers who may be paying for features or services they’re actually not using.”
Mistake #3: Treating all of your products in the same way
Attempting to achieve the same profit margin across different product categories can be a mistake, Steve notes. Each of your products can come at a different cost to make, may have been subject to different supplier cost increases and can vary in popularity in terms of your sales and customer feedback.
How to avoid this mistake
“Check your profit margins, especially if you haven't reviewed them in a while. Knowing, to the dollar, how much it costs right now to buy or create your products is vital. Check every invoice, as price increases have taken place across most items and services.”
“Remember that different customers assign different values to the same products. For any one of your products, you can optimise profits when the price reflects your customers’ willingness to pay.”
Mistake #4: Raising prices without considering your competition
Price wars can be a costly mistake which can be avoided, according to Steve. He recommends you learn to anticipate the responses of your competitors and be ready to control your reactions.
“Understanding how your competitors position themselves in comparison with your business will help you develop your flexible pricing strategy. If you can gather this information ahead of time, you can avoid the costly price wars that destroy industries’ profitability.”
How to avoid this mistake
“Visit competitor websites and retail stores regularly and make note of the prices they are selling similar products for. If your competitor's pricing is not available on their website, work with others in the industry to inquire about your competitors’ pricing structure. Keep track of your competitors’ pricing patterns throughout the year.”
Mistake #5: Failing to spend enough thought and time on pricing
“Holding a hasty, last-minute “price meeting” to finalise a price on a new product or service can be a recipe for disaster,” says Steve. “In such a meeting, people are often unprepared, so decisions can be made based on the sales team’s anecdotes without any data to back up their claims.”
How to avoid this mistake
“Establish internal procedures to optimise prices. To set a flexible pricing strategy, a business must first understand the product costs and related selling and overhead expenses.”
“Combine the material costs, production, overhead and selling expenses to arrive at the cost it takes to produce and sell a product. Then, determine an initial mark-up percentage by adding operating expenses, reductions and profits together and dividing by estimated net sales and reductions. Use the mark-up percentage to arrive at an initial price. Run volume and profit estimates to see if the estimated price delivers the profits required by the business.”
How to increase your prices
When it’s time to raise your prices, Steve recommends communicating this clearly and honestly, giving your customers plenty of advance notice.
“If you’ve decided to increase your prices, don’t approach the situation with a sense of dread. Embrace it. Customers are likely to understand that price increases are necessary for your business to succeed – and your loyal customers will want you to stay in business!”
More information
If you’d like to discuss pricing strategies or an issue facing your business, book an appointment with our free business advisory service.
You might also like to try our range of tools for your business, including cashflow forecasts and cost of goods sold calculator.
