Marketing Small Business – 5P’s – Price
Pricing your goods and services can be difficult to do especially if you make a product or provide a service where a simple percentage mark up is not applicable; it is a delicate process setting your pricing, too cheap will either not cover your costs or could de-value your product or service leading to misconceptions regarding value or quality. Too expensive and you could price your product or service out of the market or it may not live up to it’s perceived quality. So how do you as a small business provider avoid these pit falls? Before I answer that question let me give you a simple example how easy it is to lose revenue by not pricing accordingly.
Recently I required a job to be completed which, once up and running, would have a monthly service charge, the company sent out a proposal document to me after our intitial discussions, being happy with the proposal I accepted it and the work begin. Well through the project we were discussing the monthly service fee and I was confirming that I had read the propsal properly and the on going charges would be $50.00 per month, to which the person providing the service replied “no, we’re only charging you $10.00 per month as that was what I told you during our intitial discussions” you can imagine my surprise, pleasant as it was this person had just lost $480.00 per year!! No that does not seem like a lot but if I put that in percentage terms this company is losing 80% of it’s advertised revenue, how many businesses can afford to do that long term?
The point I am trying to get across here is, not only do you have to price you products or services properly, you have to have confidence in that price and stick to it, if you have done your home work your price should not be a big barrier for your clients.
So how do you set your pricing, what should you take into consideration when going through this process and how can you use pricing to increase sales?
- Decide how this product or service fits into your overall product range, will this product be priced as a loss leader; cheaper than your other products but used to draw more clients to your business. Will the product be the ultimate product in your range so priced more expensive and helping the business project an image of quality.
- How are your competitors priced, will you have to be more competitive than them to get your market share?
- By setting your pricing at a certain level will you appeal more to a certain market segment than your competitors?
- Is your product seasonal, will you have to adjust your pricing depending on the time of year?
Being flexible with your pricing or ensuring your product range is wide enough to full cater to your chosen market is the key, but whatever you do have confidence that your pricing is what it should be, if your confident your clients are more likely to pay what you want.
Hello David
We are selling specific clothing for a specific sport. We sell the gear & clothing required for competiton and also gear for apparal casual wear also specific to the sport.
We are a home based business started in April this year.
At this stage we do not pay wages or take cash from the business as we are growing the company and all profit currently goes back into purchasing to extend & expand our range.
All items are imported from overseas.
We are low profile to a degree but very active in marketing to individual & groups , this helps keep initial expenses down. But we are now coming to a crossroads where demand is cutting into available time (sorry , forgot to mention we both work paid jobs as well).
If we decide to go the “whole hog” so to speak and resign from our exsisting jobs i would like to know what would acceptable “mark up” in your opinion be required. We are GST registered as we felt in the first year we would be close to the GST threshold after we did market research & that has proven to be the case to date. I dont intend to increase the MU but it would be good to know a figure range if you are able to from what i have spoken of above.
Regards
Errol Carr
Errol Carr on September 28th, 2009
Hi Errol,
Thanks for the inquiry, pricing is always a difficult thing to set, especially if you’re feeling your way in a new market or starting up a new venture. The mark up question is quite hard to answer without nowing your costs etc, generally in the sports retail industry in Britain (where I worked for 12 yrs) we used to mark up by 200 – 300% most of that stock of course came in from Asia quite cheap to begin with), with that sort of mark up I would guess it should cover your costs and leave a extra to expand. Of course you may not be able to use this model if you were making your own apparrel.
The other areas that would need to be considered is the competition, who are you up against, what are they charging, how do you fair against them in price, do you have room to increase your pricing?
I am quite happy to sit down with you and discuss this further (my first meeting is always free, if you are in or around Christchurch
)
Dave on September 29th, 2009
Dear Dave,
and 2, up the percieved value or our goods. We make homemade donuts and they are currently 60 cents a piece and we would like to make them 70 cents. Is this too much? We are the only ones in town that fry our donuts fresh daily all the rest or the stores are grocery or gas stations. The folks in our town are not wealthy by any stretch of the imagination but do you think that this amount is over ambitious?
I came accross your website while googling how to figure out pricing in a small retail business. My husband and I just bought a small donut/sandwich shop in a small town. It is a well established business, the previous owners had it for 28 years. The problem that we are having is that we would like to raise prices. We think this is a good idea for two reasons,1: more profit
Also, the second question is, is there any wisdom the 29,49,79 and 99 cent prices for instance going from 2.50 to 2.79? I am very new to this business world and would appreciate any wisdom that you have on this issue. Thank you so much for your time.
~Kelly
Kelly Coppernoll on October 20th, 2009
Hi Kelly,
Pricing has got to be the hardest part of marketing your own business, getting that balance between profit and perceived customer value. There are a couple of things that spring to mind whilst reading your inquiry.
1) Is there profit in the donuts at the moment? If not, then there is a definite business case to increase the price.
2) If you are the only business in the locality that makes fresh donuts then yes it makes business sense to price them at a premium to reflect that fact. The tricky part is will your local market cope with the price increase.
3) Price out the competition, what are they selling their (not so fresh) product for, if it is in or around your price then yes you definitely have a good reason to increase your price.
4) I am a firm believer in pricing at 49, 99 cent increments, why? If your donut was 59 cents, would anyone really notice if it went to 69 cents; if your sandwiches were $2.49 would they really notice if they went to $2.99 The point I’m trying to make is people look at the dollars not the cents and if the price ends in a 9 before the change and it ends in a 9 after the change, generally most people wont notice unless the dollar amount increases.
5) As for the price of your donuts now, if you feel you can increase them why not increase them to 69 cents, again people will remember paying 60cents the fact that they are 60 something cents now probably wont scare many away.
The one thing to remember about pricing is you MUST have confidence in it, you have to believe that the price you have set is still giving your customers good value, if you can do that it will make the process lots easier. With that in mind it is often a good exercise to work out the actual costs of your product so you have a clear understanding of the profit margin. If you know anyone else in the same industry that you can talk to, it can be worth while asking them what size margins they set on the products that way you will get a better idea of whether you are charging too little or not enough.
One other thought, is there any merit in making a different flavoured donut? Rational here would be to make a new flavour and you can do one of two things, increase the price for the new flavour or introduce it at the current price of the original donuts whilst increasing the original donut price to where you want it. Which ever way you look at it, the customer will still get a donut at the original price but more importantly you will be able to test the new higher price at the same time (whilst minimising the risk of the overall turnover).
Hope some of this helps, if you have any other questions feel free to ask
Dave on October 20th, 2009