As a small business owner, one of the biggest challenges is getting your pricing strategy right. Have you ever wondered if your pricing is leaving money on the table? Or are your prices just stuck in the past, not keeping up with rising costs and inflation?
Inflation has been absolutely crazy in the past year, with hyperinflation causing savage price increases. If your costs have gone up, you need to look at your prices to see if your profit has been eroded. You need a solid pricing strategy that links to targeting your ideal customer.
Setting Your Pricing Strategy
There are a few main pricing strategy options – going super-premium with a Michelin star level of service, somewhere in the middle like a Sainsbury’s, or really cheap like a Lidl or Costco. You don’t have to be at the very top or bottom, but you do need to be consistent – the level of service you provide must match your pricing strategy.
Calculating Profitable Pricing
To set profitable prices, you need to understand your costs – what are your overheads and gross margins? Once you know these numbers, you can work backwards to determine what pricing and sales volume you need to cover overheads and earn your desired profit level.
I call this the “upside down” pricing approach of looking at costs first before setting prices, rather than guessing based on competitors or sticking a finger in the air. Discounting destroys profits, so avoid that trap if you can.
Other Pricing Strategies
There are other pricing models to consider, too:
- Market-based pricing – looking at what similar products/services sell for in the market
- Value-based pricing – pricing based on the value/benefit created for the customer rather than your costs
For example, as an accountant, if I can legally save a client £10,000 in tax, I could charge a percentage of those savings as my fee under value-based pricing. This tangible value is easy for clients to understand.
The Importance of Aligned Pricing
An incorrect pricing strategy that doesn’t match the value you deliver will undermine your product or service. Price things too cheaply for a premium offering, and customers will undervalue it. But overcharge for a low-value product/service, and you’ll get no brand loyalty.
You need to be brave and price at the proper level, while ensuring you deliver the quality experience to get repeat business and positive word-of-mouth. Price does signal quality to customers whether we like it or not.
Your Customers' Pain Points
Finally, you need to deeply understand your customers – their pain points, struggles, and how your product or service provides a valuable solution. If you solve a relatively unique problem in the market, that’s a premium offering deserving premium pricing.
Have great rapport with customers so you know why they buy from you specifically. That’s how to provide true value for money, leading to repeat business, referrals, and growth.
