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.
