Setting the right price for your products and services is one of the keys to success for any small business. Using the three steps for small business pricing outlined below, you’ll be able to come up with the right prices that will help to maximize your overall profitability.
Understand your cost of doing business
As a general rule of thumb, you need to be making a profit on every single item that you sell. Unless you are a clear market leader like Walmart, you simply don’t have the ability to take a loss on any sale by marking down your products to incredibly cheap prices. (Companies like Walmart “make it up on volume”, meaning they sell lots of other products where they are making a profit.)
Thus, the starting point for setting the right price is understanding your true cost of doing business. This lets you take your base cost and add a profit margin to come up with a final cost. By doing so, you can ensure that you’re always making a profit on every sale.
For example, if you own a bakery and you’re trying to come up with the right price for your cakes, you would need to take into account factors like the price of the cake’s ingredients. If the cost of a key ingredient suddenly increased by 20%, you would need to decide how much of that extra cost you are willing to pass along to the final consumer.
Explore different pricing structures
Once you know the minimum cost you can charge for a product to break even, you can start to explore different pricing structures. For example, one common pricing strategy is to offer a “basic” product or service for regular customers, and then offer a “premium” product or service for customers who need extra functionality. The bigger your business is, the more “tiers” of prices that you can offer. Think about your Netflix subscription or any other service that you use – there are always different price tiers designed to suit different customers. The goal of any company should be to “migrate” users from lower price tiers to higher price tiers.
In order to maximize your overall profitability, you should also consider how to increase the value of every sale. One way to do this is by the “upsell”. This simply means that you give customers the chance to increase the size of their order right as they’re about to make a final payment. The classic example of this is a fast-food business like McDonalds, where the “upsell” is the extra fries or the extra-large drink that you can order with your burger. Or think about Amazon – as soon as you put an item in your shopping cart, Amazon always reminds you of other products that you might also like (“customers who bought this also bought this…”). And cable companies are constantly asking you if you’d like to add a premium network like HBO to your monthly subscription.
Negotiate for profitability
Keep in mind—your prices can be flexible. They do not have to be static and unchanging. You can negotiate incentives and discounts to maximize your overall profitability. For example, many businesses offer “bulk discounts” for clients or customers who place very large orders. Other businesses offer special discounts to clients or vendors who agree to make large upfront payments. Still others will offer special “freebies” for large orders. Just think about shopping at your favorite e-commerce website—the company will generally agree to throw in “free shipping” as long as you make a purchase of a certain size. And, finally, there are plenty of incentives that you can give to clients who pay in cash, because you won’t have to worry about credit card processing fees or chargebacks. (Even your local gas station will generally give you a better price if you agree to pay in cash rather than use credit!)
The key point to keep in mind is that you need to make a profit on every sale. However, it’s up to you to determine how large of a profit margin you actually need to make on each transaction. By understanding your true cost of doing business and exploring different pricing structures, you’ll know exactly how much flexibility you have on every sale.