A pricing strategy can either make or break your small business. If you set your prices too low, you may not make enough profit to prosper. If you set your prices too high, your products or services won't sell. Pricing requires an understanding of margin, which is the cost difference between what it takes you to manufacture a product or perform a service, and what you can sell it for.
Customer Types And Pricing Strategy
Part of your pricing strategy will involve intimate knowledge of your market and the types of customers you deal with, tied into your marketing plan. You have the choice of developing a low-price niche, which has been somewhat successful for some small businesses, like one started by Sam Walton. If you choose to sell at higher prices by implying high quality and status, you can identify and isolate upscale customers looking for higher-price quality with some status thrown in.
Pricing Strategy Options
If you develop a pricing strategy that depends only on low price, the emergence of new competitors lowballing your prices will always hurt you. The better method is to develop quality products and services that cannot be undercut. One way to accomplish this is to develop loss leaders, heavily discounted products or services designed to build market awareness of your company. These loss leaders generally have little profit built into them and serve as sample calling cards to introduce your company to market segments who may not be aware of your existence. In the short-term you can also discount your entire line of products or services, but only long enough to offset competitors trying to move in on your market. Habitual discounting carries the danger of producing a low price mindset in the minds of your customers, who will then expect discounts forever on your product or service line.
New Product/Services Introduction
Pricing strategy can be used to introduce those new products and services you wish to introduce to your target market. You generally have three options.
Should you have no competition or want to set a price higher than existing competition, this strategy will work to screen out bargain hunters and identify customers who are motivated to pay more for quality. Profit margins are generally the highest with this strategy, but sales can be limited. This strategy is good for establishing your company as a premium provider and establishing a reputation as a forward-thinking company developing the latest, most innovative, or most beautiful products, which quality service a customer can trust. This strategy works best with unusual or one-of-kind products found in art galleries, certain tech products favoring a home market like home theater, restored vintage automobiles or hand-built custom motorcycles or cars.
Market Penetration Strategy
This is useful for undercutting the completion and building market share, especially useful for start-ups who want to establish company name recognition in a target market.
Matching the Competition's Offer
This strategy encourages a customer to compare your product or service quality to that of your competition, by matching your competitor's price while comparing features and benefits. This strategy can't be employed for the long-term, but is quite effective short term. Make sure that your margins are not negatively impacted when employing this technique
Remember that markets constantly shift and change. New competition appears. Older competitors go out of business. There is a natural ebb and flow to any business and bumps in the road always appear. Pricing strategy can help you to deal with change and help keep you business alive and profitable. But keep in mind that it is but one part of your marketing plan, keyed to innovation and customer service.