Deciding on how you’re going to price your goods or services as a small business is tough. Even if you already have experience in the business world, it’s easy to second guess yourself when it comes to pricing strategy.
Price too high, and you might be pricing out and putting off potential customers. Too low and they might question the quality of what you've got to offer. Additionally, your profit margins might not be high enough to keep your business afloat.
So how do you decide how to set your prices? From penetration pricing to loss-leading, here are some common pricing strategies that you could be using to maximise profits:
Penetration pricing is a strategy commonly used by start-ups or businesses introducing a new product to gain market share. It involves bringing a product to market with a relatively low price in order to attract customers away from the competition. Then, once the brand is established, prices can be increased.
In the longer term, it’s a successful way of increasing market share, so long as you are prepared to make lower profits (potentially losses) in the short term.
Unlike penetration pricing, where you enter the market low, price skimming involves coming in at a high price point. Common among technology products, the idea behind price skimming is that brand new, highly desirable products can be sold at high prices. Then, if and when competitors enter the market, you can lower prices in order to maintain competition.
Obviously, if your products or services are new, unique, and desirable, they’re more likely to achieve those high prices. But it’s still important to get the price just right, not too high, if you want to make enough sales.
Loss-leader pricing is when a business sells goods at low prices, so low they often make a small loss on the sale, with the aim of gaining more customers and more adoption. The thinking behind this strategy is that customers are more likely to become repeat customers and/or buy higher ticket items once they’ve been drawn in to buy lower cost items.
To get loss-leader pricing right, you need to monitor the balance between the items you’re selling at a loss and the regular, higher-priced items. If the focus is all on the loss-leaders, for example, without making enough sales of higher-priced items, you risk an overall loss.
It’s also a valuable strategy in terms of shifting excess inventory. Slashing prices of the items you want to make quick sales on, perhaps to make room for more seasonal goods, means you move stock quicker.
In terms of ethics, it can be seen as a grey area, mainly because larger businesses with deeper pockets are more able to bear the risk of losing too much. Smaller businesses, which generally run on smaller margins, are risking much more.
Predatory, or competitor, pricing is designed to drive away the competition. Think of the various ‘price match’ promises that you see from certain supermarkets and department stores. The aim is to draw customers away from the competition, or make sure you hold on to your existing customers, by matching or beating your competitors’ prices.
It’s a great pricing strategy for building loyalty in your customer base, but it involves some work in monitoring the competition and their pricing structures and offers.
Achieving the Right Pricing Strategy for Your Business
You don’t necessarily have to decide on just one pricing strategy and stick with it. Different parts of your business’s trajectory might call for different strategies, and you can always adjust the way you do things until you get it just right.
While you’re working on finding the perfect balance in your pricing, having a financial safety net to have your back can take some of the stress out of price adjustments. A small business credit card from Capital On Tap can support your business cash flow, whichever pricing strategy you choose to implement.