Every 2 or 3 months, I set aside a couple of hours to analyze the competitive landscape for our online wedding linens store and to see what our competitors are up to. And in most cases, it’s business as usual. Sometimes a new competitor pops up and a new one goes under. Sometimes I find some new products that I feel that our store should carry. But for the most part, things are pretty calm.

Photo by the Justified Sinner

This past week however, I noticed that one of our old competitors completely revamped their website and started slashing prices on similar products. When I told my wife about this, she seemed very concerned. After all, how could our little online store possibly compete against a store with such low prices? Unless they were purchasing their products at a much lower cost (unlikely), how could they possibly be making a decent profit?

Should we lower our prices as well? Should we try and undercut them right back? Should we up our advertising campaigns? What is the right course of action to take when you find that your competition is undercutting you in price? While I can’t answer this question for all businesses, I can tell you what my wife and I plan to do.

We Are Holding Firm On Price

First off, we are holding firm on price. Unless, we see a drastic downturn in sales for those competing products, we plan on keeping things the same. Why? There are three reasons.

For one thing, there is a wide variation in the quality of linens from one store to the next. Perhaps, our competition is charging less because they are selling lower quality product. If anything, lower prices may actually be perceived as low quality to the end customer. Because we are in the special event and wedding industry, people are willing to pay for the best quality that they can find. Therefore ironically, slashing prices could be the absolute wrong thing to do. In any case, we are going to go ahead and purchase some of our competitors products so we can see what we are up against.

Second of all, I think that our website and breadth of products are far superior to this particular competitor. Why should we slash prices when we have a better store? I believe that our customers will know that we offer a better shopping experience and have more confidence in purchasing from us.

Finally, slashing prices can only do more harm than good. If we keep cutting prices to match our competition, prices will continue to drop which will erode margins for our entire niche. In addition, the wedding industry tends to be more price insensitive so it doesn’t really make sense to compete on price alone.

We Are Filling In Some Gaps In Our Product Line

To this competitor’s credit, they have really done a good job of revamping their website and offering several products that we don’t currently offer. So my wife is currently in the process of filling the gaps in our product line and selecting new items that we can sell in our store as well. Because things have been a bit hectic with our new child, we’ve become a bit lax in improving our product line for the past several months. But now that things have settled down, it’s time to resume kicking butt!

When we first started out, my wife and I used to feel guilty about emulating our competitors. But you know what? Analyzing the competition is one of the most effective ways to improve your business and it also lights a fire underneath your butt. Why not select the best aspects of your competitors and try to do better? The more we can differentiate ourselves from other businesses and offer a more complete selection of product, the higher prices that we can command.

We Are Going To Focus More On Unique Designs

If this competitor has taught us anything, it’s that we need to focus more on products that no one else carries. We need to concentrate more of our energies on products that we personally design. This will ensure that very few of our competitors can simply copy us and compete purely on price. The main disadvantage is that it takes much longer to custom make our own linen products (sometimes this takes up to 4-5 months) but in the long run, it’s always worth it.

We Will Continue To Expand Our Free Content

Deciding where to shop often goes way beyond just price alone. Our online store offers valuable tutorials and craft ideas using our products completely free of charge. And I strongly believe that psychologically, customers are so impressed with our tutorials that they feel more inclined to buy from us even if we are slightly more expensive.

As a result, my wife and I will redouble our efforts to expand the tutorials section of our store. In addition, more quality content will lead to more backlinks which will lead to higher search engine rankings as well.

Price Isn’t Everything

While price is the most important criteria for some people, sometimes you have to ask yourself whether these are the customers you want to target. In my experience, our cheapest customers have been the most demanding, so we’d rather focus our efforts on those seeking quality and a better shopping experience.

Of course, it all starts with differentiation and selecting the right niche. If you are selling the exact same products that everyone else carries, it will be hard to avoid a price war. But if you sell items that carry an ambiguous price tag, it’s much easier to hold firm on price.

In terms of our situation, we’ll just have to see how it plays out. But I’m confident that we will continue to sell product even if our prices are higher in some cases. Instead of slashing prices, we’re going to focus on making our store a better place to shop.

Pricing your products effectively isn’t just about assigning a set of numbers to items that you sell. It’s also about managing perceptions. A common misconception is that customers shop primarily based on logical thinking. Especially with the advent of the internet and instant price comparisons, you might think that most purchasing decisions are made based on numbers and hard data.

But in fact, the average customer is not only illogical but malleable as well. Studies have shown that the perception of value presented to a customer can easily be massaged and enhanced with a variety of psychological techniques. Here are a few examples of some of the ways you can enhance a customer’s perception of value.

Make Your Customer Forget About The Percentages

Prices are rarely evaluated in absolute terms. Instead, most people evaluate discounts based on the percentage savings off the overall retail price. To illustrate this fact, let’s say you are shopping at a store that sells a particular item for 20 dollars. Would you drive to a different store 10 minutes away if that other store sold the same item for 5 dollars? I most definitely would.

Now in a different example, let’s say the item cost 10000 dollars. Would you bother making the same trip if the item was 9985 dollars at the other store? The decision becomes a little more difficult. You are saving 15 dollars in both cases, yet driving your car to a store 10 minutes away feels more worthwhile when you are saving 75% than when you are saving a fraction of a percent.

This discrepancy manifests itself because our perceptions of value are heavily influenced by percentages. Why is this important? It’s valuable information because it tells you that you shouldn’t even bother offering a discount if it’s going to be perceived as insignificant to the customer. Instead of offering a small discount, give away an item for free instead or offer something else of value that is hard to quantify.

A good example of this is when you buy a new car. Instead of giving you a couple of hundred bucks in discounts which you won’t perceive as very much, car dealers will make you feel better about your purchase by offering you free financing or free servicing of your car for a set period. The discounts are most likely equivalent either way but seem more attractive because they are presented to you differently.

Appeal To Your Customer In A Good Light

A customer is likely to pay more for an item if they believe that they are purchasing the product from a company that is fundamentally perceived as good. For example, if your store donates a portion of the proceeds to charity, a customer will be more inclined to shop with you even if you have slightly higher prices.

I’m seeing a lot of companies go “green” these days. Going “green” carries the connotation that a company really cares about the environment. Call me a cynic, but I personally think that many companies are going “green” to extract higher prices from customers. In any case, the gist of it is that if you can project an aura of compassion or good from your company, you will be able extract higher pricing. This concept carries a very close analogy to establishing a good brand for your business.

Provide Different Reference Points

Ever notice why there’s always a wide variety of products for sale that span an entire gamut of prices? It’s because we as customers are always trying to establish what we consider a reasonable reference price for a particular product. By skewing the prices of different styles of the same item, stores can heavily influence customers to purchase a more expensive product. This is best illustrated with an example.

A study was conducted where 2 sets of customers were asked to select between models of flat panel television sets. One set of customers were asked to choose between 2 television sets priced at 700 and 1000 dollars respectively. The 2nd set of customers were asked to select between 3 models priced at 700, 1000 and 2000 dollars respectively. The results of the study showed that customers were more likely to purchase the 1000 dollar model when presented with 3 choices rather than two. The majority of customers will stick to the middle of the road. By introducing additional high priced items to your mix, you can effectively push a customer to spend more money because their perceptions of the median will be skewed.

Another technique that works well is to introduce a really expensive item and provide a deep discount off of the over-inflated price. 50% off of an item that retails for 100 dollars sounds much more appealing than 10% off of an item retailing for 55 dollars. If you are selling products that don’t have an established price, this technique can heavily sway buyers to make a purchase.

Frame Your Incentive In A Positive Light

Avoid negativity when presenting your prices. Always present your product prices in terms of gains and not losses. Frame your prices in the most positive light possible. What exactly does this mean? Let’s illustrate this with an example. Which deal below sounds better to you?

• Item A sells for 1200 dollars with an instant cash rebate of 200 dollars.
• Item B sells for 800 dollars with an additional courtesy fee of 200 dollars.

The deal for item A sounds infinitely more appealing to me. I personally detest getting nickel and dimed at a store. I hate being presented with a low price only to be beset with hidden fees at checkout. Its much better to present a higher initial price with incentives than it is to offer a lower price with an additional fee. Always present your prices in terms of gains and your customer will always feel better about the purchase.

Eeking Out Those Last Dollars

The tactics presented above are by no means a replacement for establishing a unique selling proposition or finding the optimal price for your products. Instead, you should use these tactics in conjunction with the other methods described to eek out every last dollar that you can.

Further Reading

• How To Command Premium Prices For Your Small Business
• How To Find The Optimal Price To Charge For Your Products
• Are Your Pricing Your Products Too Low For Your Small Business?

In a previous article entitled how to command premium prices for your small business, I emphasized the importance of coming up with a unique selling proposition for your products and services. A good USP grants you the ability to charge a premium for the products that you sell.

Once you’ve pinpointed the strengths of your company and can effectively convey that message to a customer, it’s now time to search for your pricing sweet spot. While there’s no magical formula or quick solution to finding the right price, the techniques outlined in the article below will allow you to eventually determine the optimal pricing for your products.

One thing to keep in mind is that pricing is highly dynamic and always changing. Finding the optimal price is not a one time affair. You need to constantly keep track of your market and adjust accordingly.

Know Your Customer And Your Market

Are you targeting a high end customer or a low end budget customer? If you are targeting someone in search of a premium product, then low prices are not going to entice them to buy. In many cases, if you set your price too low for the high end customer, your products will come across as cheap and low quality.

Are you targeting an industry that is price insensitive? For example, businesses in the wedding industry can usually charge outrageous prices because brides will go all out for the biggest day of their life. Similarly, the baby care industry can command high prices as well because parents want only the highest quality products for their child.

Perception Is The Key

Pricing is all about perceived value. You need to analyze a customer to extract how much they are willing to pay. This starts by assessing and quantifying all of the benefits a customer will get from using your products. Here are some questions to ask yourself

• How much does your product reduce risk for your customer?
• How much does your product enhance your customer’s life?
• What price would be too much for your customer?
• What price would your product come across as cheap?
• How much additional profit will your product generate for your customer?

If you can answer these questions, make sure you take these numbers into account when setting your prices. Do not even consider how little it costs you to produce your product. It’s not about you, it’s about how much someone else is willing to pay. Some benefits are easier to quantify than others.

For example, if I was selling a gizmo that replaced my cell phone, GPS, mp3 player and laptop, I might set the price in the ballpark of the cost of all of the gadgets put together plus a premium for the convenience of not having to carry all of those things in my pocket. If I was selling rechargeable batteries, I would set the price at several times the cost of regular replaceable Alkaline batteries.

In many cases, quantifying the benefits of your product isn’t straightforward. Take our wedding linens business for example. When we sell our personalized wedding handkerchiefs, we are essentially selling memories to the bride and groom. How do you set a dollar value to a memory? How do you quantify the unquantifiable?

Determine Your Price

We used an iterative process to find optimal pricing for our products. In fact, we still haven’t completely perfected our pricing because we haven’t been in existence long enough to have adequate records for comparison.

This “iterative” part of our strategy is based on strategic trial and error. Thanks to our unique selling proposition, we know we have the ability to play with the pricing of our products. If we sold only commodity products, we wouldn’t have any leverage at all. That is why the USP is so crucial to a small business.

In a nutshell, our pricing strategy consists of setting an initial price for a particular product at a small premium to the market. We then reprice our products at regular intervals making sure to take detailed records how the product performs at a given price. For example, we might set the cost of one of our hankies at 10 dollars and then raise the price 2 dollars after 4 months. Following the price increase, we then analyze the overall profit for the product across the entire gamut of prices.

If we make more profit with the higher price, we continue to raise the price. If we make less profit, then we lower it back down. There are many other variables to account for as well such as seasonality and other environmental impacts so the longer the time interval, the more accurate your pricing tests will be.

What we discovered was that some items we sold were not price sensitive. We could increase the price by a wide margin and the customer would not seem to balk at all. However, with other items even a small increase in price stopped a customer from making a purchase. What is ironic is that several of the items that we predicted would be sensitive to price were not sensitive at all. Conversely, products that we predicted would not be sensitive to price were extremely sensitive to price increases.

It just goes to show that no matter how much analysis you do, your predictions will probably be wrong in some shape or form. When I look back at our plans and projections, I’ve found that our predictive abilities are pretty much nonexistent.

Increasing Your Prices

I’ve read my fair share of pricing books and they all tend to contradict each other when it comes to raising prices. Some books recommend you have a single large price increase across the board in one fell swoop. Other books recommend that you slowly inch your price up over time. I don’t think there’s a right or wrong answer. You just have to use what works for your business. For us, inching the prices up slowly across different product groups seemed to work well for us. Since we sell so many different products, it’s not immediately obvious to the customer which products we increase at a given point in time.

Conclusion

If you’re lucky enough to run a business where the benefits are easily quantifiable, then you can probably find your optimal price point fairly quickly. But if you’re like most businesses, you’ll probably need to do a bit of trial and error to find the sweet spot. Even then, you still have to stay on top of things because pricing will always change over time.

Further Reading

• How To Command Premium Prices For Your Small Business
• Pricing: Psychological Mind Games That Stores Play
• Are Your Pricing Your Products Too Low For Your Small Business?

How much is a customer willing to pay for a product or service? You might think that the most obvious way to find out would be to simply ask the customer. After all, your customers dictate the market price right? Wrong! Turns out that basing your prices strictly on customer input is probably one of the worst ways to price your products and services.

I’ll use buying shoes as an example. If Kenneth Cole came up to me and asked me how much I would be willing to pay for his latest shoe design, I’d probably say $50 (I’m cheap when it comes to shoes). After all, at the very basic level, it’s just a pair of shoes right? But if the shoes were guaranteed to increase my height by 2 inches, I would probably be inclined to pay a little more.

The example above illustrates that it is much more effective to sell solutions and not products. I don’t need a new pair of shoes but I wouldn’t mind appearing a little taller. If something you are selling provides a unique benefit or saves a customer hundreds of dollars worth of time by increasing productivity, then your prices should reflect these savings. Do not base your prices solely on the cost of materials. Your job as a small business owner is to try and find out what problem the customer is trying to solve and charge them a premium for goods and services that reflect the true value of your business.

What Is A Unique Selling Proposition?

If your business blends in with the competition, your only leverage will be to reduce prices which will erode your top line. Even if you sell commodity items, you need to differentiate yourself from the competition in order to command premium pricing for your products. That is why it is absolutely crucial to establish your unique selling proposition.

A unique selling proposition is an exclusive or differentiating aspect of your product or service that defines your business. It must be a strong statement reflecting your company’s ideals that draws a customer to what you have to sell.

Here are a few examples. If you watch college basketball on television, you’ve probably seen Dick Vitale chomping on DiGiorno pizza during the commercial breaks. DiGiorno’s unique selling proposition is that their pizza tastes as good as delivery pizza except that it comes from the freezer. Their unique selling point always rings in the back of my mind every time I walk down the aisles of my local grocery store. In fact, I don’t buy any other frozen pizza brands anymore because their pizza is inexpensive and good.

Another great example is Head and Shoulders shampoo. There are hundreds if not thousands of shampoos out on the market. But when I have dandruff, only one brand pops into my head that will solve my problem.

Coming Up With Your Own Unique Selling Proposition

So how do you come up with your own unique selling proposition? Make sure that you structure your USP based on the following criteria.

• Emphasize a particular benefit from using your products. In the Head and Shoulders example, their shampoo solves the dandruff problem
• Find something unique to say about your business. Do you carry the largest variety of a certain product in the area? Do you sell hard to find products? Can you do something that no one else can do?
• Make sure your USP paints a mental picture. For example, “KFC sells chicken that is finger licking good” creates an excellent mental image.

Here are some good examples of unique selling propositions that have already been ingrained in my head.

• Advil, advanced medicine for pain.
• Bounty, the quicker picker upper
• BMW, the ultimate driving machine
• FedEx, your package on time guaranteed

Make sure your unique selling proposition paints a picture. For example, “Quality electronics at low prices” is not a good USP because it sounds generic, doesn’t solve any problems and doesn’t paint a mental picture of the business. Here are some pointers on how to come up with a USP.

• Focus on what problem that you are trying to solve for your customer. Customers don’t give a damn about features or bells and whistles. They have a problem that needs to be solved and you are the only one that can solve it.
• Take a look at your competitors and find characteristics of your business that differ from the rest. If you can’t find anything unique about your business, then you should probably find another market to pursue.
• Look at your business from the point of view of a customer. If you were in the market for your goods, then what would you look for? What aspect of the business would compel you to purchase from them?

After you’ve jotted down some notes, try and formulate a sentence or two that summarizes it all. Make sure it paints some sort of picture in your mind. For our line of wedding handkerchiefs, our slogan is “Personalized keepsakes to dry your tears of joy”. It’s simple, catchy and captures the joy and happiness of a bride on her wedding day.

Demanding Top Dollar

Once your unique selling proposition is ingrained in the minds of customers, you’ll be in the position to demand higher prices. One of the biggest problems a small business faces is what I call pricing inertia. You’ve sold a product for years at a certain price. You’re making a good profit and you are satisfied with your cash flow. Why should you raise your prices?

This question can best be answered with another question. Why be satisfied with a good profit when you could be making an astronomical profit? The fact is is that if you don’t know what problem your customer is trying to solve and what he or she is willing to pay, you could be leaving a lot of money on the table at the end of the day.

Further Reading

• Pricing: Psychological Mind Games That Stores Play
• How To Find The Optimal Price To Charge For Your Products
• Are Your Pricing Your Products Too Low For Your Small Business?

Whether you are freelancing or running an online business, your net profit is largely dependent on the prices you charge customers. Pricing is difficult to get right. If you set your prices too low, you won’t make any profit whereas if you set them too high, you’ll drive customers away. Because pricing is such an important topic for businesses, I’m going to devote several posts to exhaustively explore ways to help you find the pricing sweet spot within your niche. This particular post will help you detect whether you are setting your prices too low.

Especially when your business is just starting out, you won’t have many data points to work with and the lack of data will make setting prices especially hard. Because you may be forced to rely on guesswork or extrapolations from comparable products to determine price, chances are you’re not going to get it right the first time. Whereas it’s more difficult to determine if your prices are too high, it’s usually much easier to figure out if your prices are too low. Here are some indicators to look for if you’re shortchanging yourself on price.

You Feel Like You’re On A Hamster Wheel

Do you feel like you are working your butt off yet not seeing much profit? Are you moving a lot of product out the door with nothing to show for it? More often than not, you are shortchanging yourself on price. At the very basic level, pricing begins with determining how much profit you need to generate to maintain a proper wage. It’s actually quite astounding how many people go into business without even considering how much money they need to make in order to make it a worthwhile investment. Here’s an article I wrote on how to determine if your business is viable that you should definitely check out if you have the time.

Pricing starts with determining what revenue targets you want to hit based on the number of units you think you can sell. If you don’t believe that you can make your targets based on your current pricing, you either need to raise prices or find a new market to pursue altogether.

Your revenue targets are usually determined by your operating expenses. Make sure you account for each and every one of your expenses when trying to determine your potential profit. If your projected revenue minus costs yields a satisfactory profit, then your pricing is probably at least in the proper ball park. According to the Small Business Administration, the average small business makes between 10-15% profit before taxes. Taking the average profit of your industry into account, you can make a good guess as to what you need to charge to make an average wage.

My wife and I fell into the trap of pricing our products too low in the beginning. Our main problem was that we didn’t properly factor in all of the costs involved in selling our goods. For example, we didn’t account for the high percentage of defective product we would be receiving nor did we account for fuel and packaging expenses to deliver our goods to the end customer. While it was quite satisfying to see product moving out the doors, we basically worked our butts off for the first month and ended up just breaking even.

You Attract A Lot Of Cheap Customers

I don’t quite understand why this phenomenon occurs, but cheap prices always attract super cheap customers. You would think that already rock bottom prices would discourage a customer from haggling with you, but the opposite is true. Low-ball prices encourage customers to try and low ball you some more. It’s analogous to a situation that my friend was in recently when he tried to sell his house. He initially set the price on the low end so he could get a quick sale of his property. What ended up happening was that he attracted many bargain hunting home buyers. After receiving a bunch of low ball offers, he ultimately decided to pull his property off the market and upped his price to eliminate the riffraff.

If you find your business dealing with a high percentage of pain in the ass cheap customers, then chances are you need to raise your prices. You’ll have to experiment for a while, but once the cheap customers go away, you’ll know that your pricing is at least in the ballpark of what you should be charging.

Our phones used to ring off the hook back when we offered ridiculously low prices. We’d get a ton of calls from people who just wanted to haggle with us just for the sake of haggling. In some cases, I didn’t even think that these people ever had the intention of buying anything to begin with. It’s ironic, but raising prices stopped 90% of our customers from ever trying to negotiate on price again.

You Win All Of The Contracts You Bid On

This applies more to freelancers and contractors, but if you find yourself winning all of the contracts that you bid on, something is grossly wrong. Either you are majorly shortchanging yourself, or you are hyper efficient at what you do. Perhaps you have a significant competitive advantage, but in most cases, it means you are setting your prices too low.

My dad used to run a business that relied heavily on winning government contracts. No matter how hard he tried, he could never bid low enough to beat this one company who seemingly won every contract. My dad always assumed that this company was extremely successful and had some sort of major competitive advantage in the field. A few years later, the company filed for bankruptcy. No doubt, their low ball pricing tactics eventually caught up to them.

Conclusion

It’s not always easy to tell if your price is right, but you need to at least set the price at a minimum level to stay in business. It’s very easy to set your prices too low in the beginning when your business is just starting out. As a new business, you’ll often feel the need to price yourself lower to drum up initial business. This is all fine and good as long as you believe you are getting compensated enough for your efforts.

Further Reading

• How To Command Premium Prices For Your Small Business
• How To Find The Optimal Price To Charge For Your Products
• Pricing: Psychological Mind Games That Stores Play