In some economies, such as the US one, small business plays a significant role. Even though working on your own has great perks, small business owners are also faced with difficulties. One of the difficulties that are common to every business, but which gets highlighted in small ones is choosing the right pricing strategy. Therefore, pricing intelligence has become an essential part of every business, especially eCommerce.
If you’re a small business owner – or you’re planning to become one – you need a deeper understanding of pricing strategies.
Deciding how much to charge for your product goes far beyond simply calculating your costs and setting a price that is higher than that.
Once you have a clear goal, you can start reviewing different pricing strategies in order to understand the bigger picture.
Let’s walk you through some of them.
What is a pricing strategy and why it is so important?
First things first. You can not choose the right pricing strategy if you don’t understand what a pricing strategy is. Pricing strategy refers to all methods that businesses are using to price their products or services. However, under that term, a lot of things are included: market conditions, competitors and their actions, customers, location, different costs (variable, production, distribution costs, etc.) As you can see, there’re a lot of factors that need to be taken into consideration.
Choosing the right product price will help you reach the set goal. That goal can differ from company to company. In most cases, businesses tend to maximize profit margins. But, contrary to popular belief, that’s not the only reason why a pricing strategy is important. For instance, you can decide to sacrifice your profit and set the lower price if your goal is to prevent other competitors from entering the market, or you want to maintain your hold on market share. Many options are on the table, but not all of them will be suitable for your business.
5 pricing strategies that a small business should consider
As we said, a pricing strategy lies upon many factors. Therefore, some strategies are more appropriate for bigger or enterprise companies then for the small ones. In other cases, the fact of offering a product or a service is also an important factor, since those two categories might request different strategies. Here are 5 strategies that you should take a look at as a small business owner.
- Penetration pricing
For small business owners, this strategy can come very useful. You’re very likely just trying to enter the market and present your product to your future customers. This strategy helps you attract customers by offering a lower price than your competition. Even though we said that customers aren’t deciding solely based on the price when you’re a new player on the market, you can’t rely on a brand name, do you? In the beginning, your goal is to make yourself noticeable on the market. Once you’re present and customers start to see the value of your product, your price can change.
However, it’s clear that penetration strategy can also be risky since it’ll bring an initial loss of income. Over time, with increased awareness, you can find your way to stand out among other competitors. When your market position becomes more stable, you can always increase your prices and make necessary changes.
- Premium pricing strategy
Contrary to the previous strategy, in this case, businesses tend to set a price that is higher than the competition. This can only be done if you’re sure that your product is unique and similar to no other available on the market. In order to use this strategy, you need to have a competitive advantage. Only then you can be sure that you won’t be undercut by competitors who’ll offer a lower price.
As you probably understand, this strategy is not the safest option for small businesses who’re just entering the market. However, if you’re completely sure that you have a completely unique product, and that you can ensure a luxury packaging as well as all the appropriate marketing activities, you can still give it a try.
- Price skimming
Price skimming is a strategy designed to help maximize profit from newly launched products. It’s based on setting higher prices during the initial phase of the product launch. Afterward, when other competitors become present as well, you can lower your prices in order to be more appealing then they are. One of the benefits of this strategy is that it can help you connect with early adopters as well as with price-sensitive consumers.
Also, this strategy can help you with creating an image of exclusivity when your product gets to be introduced to the market.
- Bundle pricing
This pricing strategy is very popular among all businesses, not only the small ones. Bundle pricing strategy indicates that multiple products are being sold for a lower price than buyers would face if they purchased each item individually. Of course, the bundled products must be logically connected. For instance, a small, local restaurant can offer bundle pricing for a meal and some beverages. That way, customers understand that it’s cheaper to make use of this offer, then to buy each product individually. Who doesn’t love a good deal, right?
This strategy can come beneficial in cases of reducing inventory. However, businesses, especially small ones, need to be very careful here. The profits they get from the higher-value items must compensate for the losses on the lower-valued ones.
- Psychological pricing strategy
As the name suggests, psychological pricing strategy implies that customers are encouraged to make emotional, rather than logical decisions.
Many research was done on this topic. It turns out that customers tend to perceive prices which are basically the same if they are presented in a different way. For example, if they have to choose between a jacket that costs $99 and the one that is $100, the vast majority will go for the first option. The reason behind this is that consumers tend to put more attention on the first number shown on a price tag.
Pricing needs to match your target market
To sum it up, setting the right pricing strategy is one of the most important steps in your business strategy. There is no one-size-fits-all pricing strategy. Therefore, it’s important to keep in mind that your focus must always remain on the customers. What attracts some customers will turn off others, and there is no way to please everyone.
What are your thoughts on pricing strategies? Feel free to share them in the comments section!