When small businesses struggle to grow – or even survive – the role of pricing is often misunderstood. Many entrepreneurs assume that price increases put them at an automatic disadvantage. But that’s not necessary if you have a clear pricing blueprint for your business. Pricing consultant Rafi Mohammed, for example, argues that small, strategically targeted price increases can actually give a company a competitive edge.
The key is to bridge the profit disconnect that plagues 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. As a result, most companies are leaving profits on the table daily, argues Mohammed.
For businesses seeking bottom line growth, better pricing can be the quickest path to better profits. “In many cases, prices can be changed on Sunday night and new profits will start rolling in on Monday morning,” said Mohammed.
Achieving optimum pricing, however, requires thinking more holistically about your strategy. 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, offering a choice of prices, versions and pricing plans can attract more customers and improve profits.
Here are some pricing tips to consider:
• 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.
• Price for value. Take a lesson from street vendors who understand better than anyone the principle of value-based pricing. Umbrella prices go up the moment it starts raining. It has nothing to do with the cost of the goods, and everything to do with the value the customer places on the product.
• Know your value proposition. Create a “value statement” for all of your products and services. This is a simple declaration of why you are proud of what you sell, and why customers should buy it from you instead of someone else.
• Avoid one-size-fits-all. Pricing is more personal than you might think. Customers have different needs, product preferences and expectations. For example, some prefer package pricing, while some like a la carte. Implement a series of pricing tactics that serve those different needs. •
Daniel Kehrer can be reached at editor@business.com.
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