If you've ever wondered how to correctly price your small business's products or services, you're not alone. It's a problem that has plagued small business leaders for years. This article will shed some light on the ways you can maximize your potential in the marketplace without selling yourself short.
The importance of correctly pricing small business services
When it comes to your small business, pricing your products and services correctly could mean the difference between profitability and taking a loss. Not only that, it will also play a key role in the way you are perceived by prospective customers in the marketplace.
Pricing your offering too high could turn away valuable customers, while pricing too low may lead to underestimating your value, not making a profit, and being seen as a lower quality option by your customer base. Therefore, setting the right price from the get-go is essential for your business to be successful. Here are a few strategic ideas we teach for pricing products and services correctly.
1. Consider your customers and the value you provide them
The first step in accurately setting a price for your offer is a keen awareness of your customers' needs and the value of your product to that group of people.
No matter what you have to offer, we always recommend that businesses create more value for their customers than they take. Let us explain. When a customer decides to buy from you, they're essentially making an investment into their future. Whether it's an article of clothing, a sandwich, or a piece of software, your customers want their purchases to be justified (especially if they have to pay a higher price point).
So ask yourself: "will my target customer get a return on their investment with this purchase?" That return doesn't have to be monetary but could be status (in the case of the article of clothing), satisfaction (for the sandwich), or convenience (for the piece of software).
One important lesson we teach in our Marketable Brand Framework is that customers don't buy your product or service, they buy a solution to a specific problem.
If you solve bigger problems, you can charge bigger prices.
Additionally, if you are charging higher prices, it's important to build trust with your target audience before expecting them to make a purchase. Consider giving away something for free (or very cheap) to that audience in the beginning that will demonstrate your value to them and make it easier for them to justify a bigger purchase.
Beyond that, ensure that both your marketing messages and sales communication demonstrate the great value that your customers will only receive from your brand and make the decision to buy from you a no-brainer.
You don't want to constantly be on the defensive when it comes to your pricing, trying to justify the price point to every customer interested in your products and services. If your audience can see the value that you provide and read testimonials from others who have benefited from that value, your new customers won't bat an eye when they hear how much you're charging them.
Note: it's not always a bad thing to charge less for what you offer when you're just starting out. Your first few customers are a great opportunity to collect raving reviews, so don't be afraid to lower your price a little bit in the beginning. Trust us, it all comes back around.
2. Evaluate your expenses
Whether you're selling a product for a few dollars or a service that costs thousands, you have to be strategic in your pricing as a few dollars difference can sometimes lead to making or losing out on a lot of money. It is absolutely crucial to get hyper-specific on the costs associated with creating and distributing the thing you plan to sell - this includes the costs of manufacturing, materials, assembly, delivery, labor, time, marketing, etc.
Some industries like car manufacturers have extremely high overhead costs, while digital products might have an upfront cost but little expense thereafter.
Following these initial calculations, you should be able to determine the minimum price required to break even. From there, you can decide on the price of your services and the amount you'll need to sell to reach specific monetary goals.
3. Research your competitors
Another important factor to consider when pricing your offer is the competitors within your industry. Start by listing out a handful of competitors with varying levels of expertise, size, and experience. A competitor analysis will allow you to see specific ways your brand stacks up to the competition across multiple areas.
Research what similar businesses in your industry are charging for similar services. Look at the quality of their work, their reputation, and the level of service they provide to determine where your business falls on the pricing spectrum.
Customers in the marketplace today will do their due diligence when it comes to researching the prices of various brands before making a purchase, and it will serve you well to know what you're up against. By understanding the strategy employed by your competition, you will be better equipped to create messaging that proves your worth and the price point you have set for your product. If a prospective customer tells you they can find a cheaper price elsewhere, you should be able to articulate the value of your product over that of your competition, proving that a higher price is justified for the value they will receive.
4. Avoid the temptation to be the cheapest
Many business leaders think that being the cheapest option in their market will attract new customers to their brand over others. And while this can be a good strategy in a few instances (namely in industries that overprice their services), as we discussed in the last section, it is likely that your competitors have priced their services at a specific price point for a reason.
Additionally, pricing your services lower than everyone else will most likely mean that the people coming to you are just looking for a cheap option and are not interested in paying for quality.
It's important that your brand have a clear Unique Selling Proposition (a quality that differentiates you from others in the marketplace), and while being the most affordable option could be a good angle, it's usually better to settle on something more concrete.
Characteristics like higher quality products, superior innovation, or better customer service do a better job of highlighting your brand's dominance in a particular area rather than simply claiming your brand is the cheapest.
If you attract customers who value your brand simply for your low price, once you decide to increase the price of your products or services it is likely they will leave you for a cheaper option. But if you highlight one of these other characteristics (like quality, innovation, or customer service), your customer base will stick with you, even if you decide to increase the price because they will appreciate your value that cannot be easily replicated elsewhere.
5. Provide different pricing options
Many businesses worry that if they set a specific price for their products, they'll limit opportunities with certain clients who are looking to spend less or willing to spend more.
One way to appeal to a wider range of customers (from those willing to spend a great deal to those working on a tight budget) is to offer different pricing packages. By doing this, you won't limit your customer base, allowing your brand to cater to a larger audience and increasing your chances of making the sale.
Usually sticking to three pricing options is best as too many more than that could run the risk of confusing customers or distorting the value of each price point.
At The Marketable Brand we utilize this strategy for teaching our six-step framework. By offering three different options for our clients to learn the framework, we provide varying levels of support and expertise as they build out a marketing plan. This allows our team to work with brands willing to pay a higher price and those just looking to explore the framework for the first time.
6. Regularly review your pricing strategy
Pricing is not a one-time decision; it is an ongoing process that requires consistent evaluation. You should regularly review your pricing to ensure that it is still competitive and profitable as new businesses enter the marketplace.
Will Yang, Head of Growth & Customer Success at Instrumentl, argues that price adjustments are an essential part of any effective pricing strategy:
"Adjusting your price is usually necessitated by several factors, including increased operational costs, higher demand or value perception, entry into a higher market segment, or the need to remain competitive. Frequent small adjustments are more favorable compared to radical price changes as they're less likely to alienate existing customers."
The key here is to have a clear understanding of why you are adjusting your pricing, keeping the needs of your customers at the forefront of that decision.
When you gain more experience, more reviews, and more credibility, don't be afraid to adjust your prices accordingly. Most customers are willing to pay more for a tried and true option over one that is cheaper but not as reputable.
Conclusion
In conclusion, pricing your services is not alway a straightforward task, but it's a critical one for the success of your small business. By demonstrating your value (both before the customer makes a purchase and especially after), you will keep customers satisfied and coming back for more, even as your prices change over time.
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