Most small business owners will agree that developing the right pricing strategy is one of the most critical factors of any product or service’s success in the marketplace.
It is also often the most confusing question for my clients who own small businesses.
Pricing, I’ve found is more a science and a process rather than an art—you need to do your homework before establishing the right one.
What exactly is that homework? Here are the steps:
Who are you? Determining Your Brand Strategy
In other words, what is your brand strategy?
For example, if your product is the Sharon Stone (for car lover’s let’s give another example—a Rolls Royce) of your industry, you’ll have a much higher price than your competitors versus if it’s a Britney Spears (Neon).
Your price must be aligned to what is the positioning of your product or service. Otherwise people won’t understand why you’re charging too much for a Britney Spears or too little for a Sharon Stone.
What are your costs?
This is something that a surprising number of small businesses are rather nebulous about. Your calculated costs should include everything from:
- your own hourly labour cost at a standard industry rate (i.e. If you were to retire tomorrow, how much would you have to pay someone to do the same job as you?)
- raw materials of the product or service you’re producing
- transportation, customs fees etc. other costs related to the business
- fixed costs such as rent, electricity etc. directly or indirectly associated to producing the product or service.
This step is absolutely critical to the whole process of pricing and you need to be as accurate in this step as you can.
What is the average industry mark-up percentage?
Mark-up is term used to define the profit as a portion of the sales price. Therefore it’s figured out by dividing your profit by your sales price.
I.e. (Sales price-Cost=Profit)/Sales Price is your margin.
Knowing what the standard mark-up in the industry will give you a starting place to position your own price in the marketplace.
The Informational Interview
And how will you go about finding such delicate information about other companies, you ask? Through a very powerful and effective tool called ‘Informational Interviews’, of course.
Informational Interviews (II’s) are simply posing industry related questions to people (often strangers or sometimes referrals) who own similar businesses in non-competing markets or sectors for the sheer benefit of gaining information.
For example, you can hold an II with an ad agency who specializes in pharmaceutical companies if you specialize in packaged goods companies and want to ask them about their margins on printing brochures. Chances are that since you don’t compete with them, they’ll help you with the information you need and that the margins in their market are similar to yours.
II’s will provide you with lots of critical information you need to help your business grow.
What price do you get when you put the standard industry markup on top of your cost (from Step2)?
What prices are your nearest competitors charging?
Take a look at similar sized companies with similar brand strategies and products who operate in the same industry as you. If you’re within the same range, then your pricing is a competitive one.
If your marked-up price (from Step3) is less than your competitors, increase at least to their level. If you’re marked-up price is higher than your peers for a similar quality of product or service, look at reducing your costs and thereby your prices. I.e. Can you get cheaper materials or pay less for your couriers or rent etc?
Will the market bear your price?
Ask a representative group of your buyers or customers if they would be willing to pay this price for the product or service you’re supplying.
Again, if you frame this as an II question rather than a sales pitch, you will get helpful answers to steer you in the right direction.
Once you have the right price, test it in the market to see if anyone is truly buying it and how the sales are going. If there’s a lack of response to your price in the market or you start to lose sales after a rise in your prices, you need to re-examine either your product design, quality or your competitors to see how you can keep on top of the game.
What I want for all of you is to be swimming in new business because you’ve got the right price, product and distribution channels. But it all starts with price.
With kindness as always,