When releasing a product or service, many small business owners come to a metaphorical fork in the road when deciding on how much to charge their customers. Is this price too high? Am I lowballing myself? Instead of asking how much you should charge, find the value of your product and the best approach to setting a price.
One of the biggest mistakes small business owners make is setting a price too high which ultimately scares customers away. Another mistake is setting a price so low that the business only profits a pittance per sale (also known as playin’ yourself).
Although it takes a bit of research and brainstorming, your business’s pricing strategy deserves a well thought-out process. Here is a guide on how to choose a price that works for both you and your customer:
1. Determine the value of your product or service
Set numbers aside for a moment and analyze how valuable your product is: Is it in high demand? Will it improve the lives of others? Does it provide efficacy to a much-needed market? Does it solve a problem? These are important questions you should ask before slapping a price on your product. Not only will it determine the value of your product and help you set an actual dollar amount, but it will also help you add value if you realized your business is lacking in that area.
2. Research your target audience
Before setting a price, you must know who you are selling to. This is where tons of research on your target market is useful and will help you avoid the “your budget ain’t my problem” mindset. Simply put, you have to know the pockets of your customers. Some questions to research are: What is the average annual income of my target audience? What are their spending habits? Once you know who you are selling to, the better you will be able to gauge an appropriate price.
3. Choose a pricing strategy
Now, that you know the value of your product and the finances of your target audience, it’s time to choose a method that will allow you to go from theory to practice. Check out these pricing strategies:
Economy Pricing
Just because the word “economy” is used, doesn’t mean that everything is for the low. It does mean that your prices are lower than similar products or services. This pricing strategy works extremely well when your product is a necessity or is in high demand. The goal here is to keep your overhead low, so you can afford to offer economical prices to your target audience. It is truly a win-win for you and your customer.
2 For 1 Pricing
This pricing strategy is the ultimate “scratch my back” and “I’ll scratch yours” method. If you have two agreeable products (i.e listening device and headphones), consider offering them together for one price. Customers get a bundle deal and you — the business owner — moves product for profit!
Luxury Pricing
So, your product is fly and hands-down better than your competitor. If this sounds like you, then consider setting the price equal to your product’s value. To set a fair price, you must first scope out your competition and their prices on similar products. If you can provide a higher quality product, then customers won’t mind paying a little extra.
Innovative Pricing
This one can be a bit tricky because there is no blueprint to follow or reference point to refer to. This method is put in place when a “first of its kind” product is introduced to the market. Setting a price for such products or services is complex because customers haven’t determined the product’s value or demand. In this case, it is wise to set a target audience friendly price.
Let’s be clear, as a small business owner, you should prepare your company and your pricing strategy to adapt to any changes in the market. Things like recessions can happen and make consumers dial back on spending, or maybe the company you provide services to is going through a temporary financial restructuring. Whatever it is, be ready to adapt, if need be. This might look like having a strategy to cut overhead costs or adding more value to your product.
