Small business pricing strategies are a tricky challenge, even for well-established businesses. It can be difficult to assess whether your prices are too high or low and what other hidden factors should determine the most effective price for what you’re selling.
Pricing strategy is a complex formula requiring a whole lot more consideration than just the cost of materials. You have to consider the salaries and benefits you might pay any employees and forecast your cash flow with an eye toward hidden costs like insurance coverage, taxes, and unexpected repairs. Controlling your business finances requires having some amount of accrued savings for a rainy day fund.
Factors that help you determine prices include knowing your target audience and what they’ll pay, checking what your competitors are charging, and whether your product or service offers some value that isn’t available elsewhere. The accessibility of your location could be another factor.
But aside from those fundamental factors, there are several proven and effective price strategies to mix things up and boost sales, revenue, or both.
1. Budget Pricing
This strategy is the “cheap as possible” method for luring the highest volume of sales. Generic foods and drugs excellent examples of budget pricing. It’s an appropriate strategy for low-cost goods with bare-bones packaging, where the product is so affordable that you can sell it for a low price and still return a profit.
But budget pricing can be risky for a small business. Sure, everyone likes a deal, but these are deals that could hurt your profit and loss position. It’s a strategy that works well for big companies like Walmart, who can buy in bulk and has highly efficient distribution. Your small business may not fit that category.
2. Cost-Plus Markup Pricing
Also known as cost-plus pricing, this pricing strategy is the simplest. You calculate your cost for the goods or services and mark that amount up by a certain percentage.
There’s an adage that many retailers simply double the cost of their wholesale goods. This thinking may be true in many cases, but take into account that you may want to consider a higher markup percentage to improve your cash flow or go with a lower markup to keep your prices competitive.
3. Dynamic Pricing
You’ve heard of “surge pricing” on Uber and Lyft, the most well-known example of dynamic pricing. Hotels and airlines often use this flexible pricing strategy, charging more at peak volume times to boost business revenue and push more sales when demand is lower.
A retailer can sell a lot more umbrellas on a rainy day, for instance. Understand that consumers may realize that you’re manipulating price based on circumstances, and that could hurt loyalty, but the rewards can be great.
4. Impulse Pricing
Ever notice how items are priced at, say, $9.99 instead of an even $10? That’s not an accident. It’s proven that consumers will pay more attention to that first number in the price. Impulse pricing plays on psychological factors, like paying attention to that first number on the price tag or the sudden urge to buy an item they hadn’t planned on buying.
5. Market Penetration Pricing
New businesses with plenty of competition may want to consider penetration pricing, which is entering the market at a lower price than anyone else. You get the consumer’s attention and begin to build loyalty.
If your business has received an investment, loan, or other additional financing, this situation could be a great time to use penetration pricing. But it’s probably not a good idea to keep using those low introductory prices for the long term.
6. Package Pricing
Not unlike a “meal deal” at a burger joint, package pricing bundles several items together at a lower price than each of the items would cost if purchased individually. Customers will feel they’re getting more value, and it’s a good way to goose sales of items that are near the end of the life cycle or selling poorly.
Package pricing is certainly a good idea when you have overstock of a particular item. Just pay attention to your bookkeeping software to ensure you’re making an adequate profit on the higher-priced item to recoup the loss you may take on the lower-priced item.
7. Premium Pricing
Not everyone can get away with premium pricing, the practice of charging more because the brand or item has unusual prestige or value in the eyes of the consumer. This model totally ignores the actual cost of the goods and experiments with how much the market is willing to pay.
New brands and businesses may not be good candidates to use premium pricing, at least at first. But if the product or service fills a need that cannot be filled otherwise, premium pricing could be an effective strategy.
8. Price Skimming
With price skimming, you charge a higher price on a brand new product or service, simply because it is new and has novelty. New tech gadgets are often released at a higher price, but then the price is later reduced to attract more buyers.
It’s important to remember that Apple was criticized for price skimming when they lowered the price of the original iPhone by $200 a couple of months after its initial release. But it’s also important to remember that most of those early buyers remained loyal Apple customers, so the scheme seems to have worked.
9. Promotional or Freemium Pricing
The word ‘freemium’ is well known in the smartphone app sector—a combination of ‘free’ and ‘premium.’ In apps or software, there’s often a bare-bones free version of the service, but then certain features cost more money. Our accounting software and app Sunrise has a free self-serve version.
Freemium and promotional pricing can also be applied to brick-and-mortar businesses. Subscription services or memberships can start with a free month or trial period, hourly charges can be sweetened with a free hour or two, and first-time visitors might be offered a free item with a purchase.
10. Value-Based Pricing
Value-based pricing puts everything in the eyes of the consumer, basing the price entirely on what consumers are willing to pay. This strategy can be useful in an economic downturn or when the market is glutted with the product you have.
You don’t have to pick just one of these strategies—you can use several at the same time. Using different pricing ideas can help you determine the high end of what your customers would be willing to pay, and finding that can give you a really cheap thrill.