Pricing strategies for small business
The pricing strategy of your small business will ultimately determine your fate. Small business owners will ensure profitability and longevity by paying close attention to their pricing strategy. To often small business owners feel that the lowest price wins.In business plan after business plan the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a quick view of competitors and assuming you can win business by having the lowest price, the reality is this is often not the case.
Having the lowest price is not always a strong position for a small business. Larger competitors who have deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. In order to avoid the low price strategy a small business owner must start with looking at the demand in the market by examining three factors:
- Competitive Analysis-It is important to not just look at your competitor's pricing. You should look at the whole package they offer. Examine if they are serving price-conscious consumers or the affluent group? Are there value-added services your competitor gives for free?
- Ceiling Price-The ceiling price is defined as the highest price the market will bear. Small business owners should survey experts and customers to determine pricing limits. Keep in mind that the highest price in the market may not be the ceiling price.
- Price Elasticity-As a small business owner you will need to understand that if the demand for your product or service is less elastic, you can then have a higher ceiling on prices. Low elastic demand depends on limited competitors, the buyer's perception of quality, and consumers who are not habituated to looking for the lowest price in your industry.
Once you understand the demand structure in your industry, you can then review your costs and profit goals as set in your business plan or financials. The low price strategy is always best avoided by small business but there are conditions such as a price war that can drag a company into the lowest price battle. Small business owners should do all they can to keep this from happening. This becomes a huge problem since a price war can wreck havoc in any industry and leave many businesses, out of business. History is replete with examples of entire industries that are no more due to the problems brought on by a price war. Small business owners can take these tips to evade a deadly price war:
- Enhance your exclusivity-Products or services that are exclusive to your business provide protection from falling prices. Consumers understand that the only place they can get what they want is with you.Work to make sure that you are correctly marketing to your niche target market.This way you can avoid consumers "shopping around".
- Drop any high maintenance goods-Examine your product and service lines carefully. There may be products or services in your business that have high customer service and maintenance costs that you even are unaware of. Now is the time to drop the unprofitable lines and find out what customers really want.
- Value-added features- Find value that your business can add to stand out in the marketplace. You want to be the most unique business in the category.
- Branding-Develop your own brand name in the market. Brand name businesses can always stand strong during a price war.
The bottom line is to leave the price-cutting and price wars to big business. Small businesses who have solid pricing strategies can escape a price war and low price position. Carefully, consider your price decisions since your business depends on it.