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Pricing’s role in profits

Posted 2/10/14

The role that pricing plays in the financial structure and competitive profile of a small business is often misunderstood. Many business owners and entrepreneurs automatically assume that price increases put them at a disadvantage. But that’s not necessarily so if you have a clear strategy for setting prices at your business. Some pricing experts, for example, argue that small, strategically targeted price increases can actually give a company a competitive edge.

The key is to bridge the disconnect that exists between pricing strategy and profits for so many businesses, both large and small. Proper pricing is more complex that most of us realize. Business owners usually see pricing as a mix of markups, margins and matching the competition – plus a modicum of “gut feeling.”

But such an approach has no relevance for the most important component of all: What customers are actually willing to pay.

Achieving optimum pricing, however, requires thinking more holistically about your strategy. It’s NOT simply a matter of jacking up prices across the board. Most businesses can benefit by employing a variety of pricing tactics – and so can customers. Instead of presenting customers with one take-it-or-leave-it price, for example, offering a choice of prices, versions and pricing plans can attract more customers and improve profits.

Here are pricing tips to consider:

• Focus on profit, not margin. Many businesses equate “high margin” with pricing success. Maybe so, but a high margin can also point to opportunities to serve more customers by using discount tactics as well. Profit is your goal, not margin.

• Avoid the markup mistake. The most common pricing pitfall is setting your price based merely on a set markup. Such “cost-plus” plans often forego potential profits because they never account for what customers are willing to pay.

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