Healthy margins are essential to launching and growing small businesses and finding the right price helps maximize profitability and future growth. Product pricing is not something that comes naturally for most people, but it is an essential skill that small business owners need to hone.
As small business owners set their price for their products and services, understanding the value and time is critical. The higher the quality of the product or service, the higher price customers are willing to accept. However, high prices on low-value products or low prices on high-value products will eventually cause customers to question their worth. Here are five pricing strategies to maximize profits and secure competitive advantages in the market.
1. Wholesale to Retail: Calculate all costs in both manufacturing the product and selling it. Through this process, it is important to clarify how you will sell your product. For example, if you plan to sell through retailers, you’ll need to budget for commissions. When approaching retailers, your selling price is the wholesale value. Retailers resell products, so it’s important you don’t compete with your partners when setting your retail price. Consider the pricing model of wholesale price = total cost x 2 and retail price = wholesale price x 2.5. For example, if your total cost is $40, your wholesale price is $80 and your retail price is $200.
2. Premium Pricing: This approach sets high prices and is most often found among businesses that have a unique product. It should be used if your product has a competitive advantage, such as a trade secret or a patent.
3. Bundled Deals: You can sell multiple items together for a lower price than consumers would pay individually. A common example is Buy One Get One Free, or Buy One Get One Half Off. This strategy is effective at increasing customers’ perceptions of value while reducing your inventory.
4. Limited-time Offers: This strategy creates a sense of urgency and compels a customer to purchase immediately. Consider using a discount or inventory countdown timer on product pages.
5. Psychological Pricing: This approach uses marketing techniques to encourage customers to impulsively purchase goods. For example, placing cheaper or edible goods in the checkout line is proven to increase sales.
After you’ve implemented a pricing strategy for a few months, review and revise your plan. Depending on your situation, you may need to shift pricing to meet new market forces, adjust prices for goods and/or address a competitor. Don’t be afraid to make adjustments when necessary. A great pricing strategy helps your business stay competitive and attract new customers.