Best Pricing Strategy For Small Business: Why So Many SMEs Struggle With Pricing? ⌛
So many SMEs struggle with pricing because they think a one-size-fits-all pricing proposition is good enough in the early stages when it’s not. We understand that setting up a business is full of challenges. It needs a huge amount of will power, patience, time and effort. If you are a small and medium-sized business owner who wants the best pricing strategy for small business, you want to gain a detailed understanding of what your customers value about your products or services, before you set prices. Thus, if you want to learn more about the topic, read on.
In addition, you will also gain knowledge on how not to undercharge or overcharge your customers. Furthermore, you will discover how to price your new products and of course you will know the best pricing strategy for SMEs.
A value-based approach to pricing is the basis of a robust pricing proposition that’ll help you generate significantly more revenue at higher margins. While slaughtering the competition in the process.
The best pricing strategy for small business to avoid under or overcharging your customers
It is common for SMEs to undercharge a product or services when they think their product or services are of low value to the customer or commonplace in the market. They feel their only option is to compete on price and do not test their assumptions on value with their actual customers.
This type of pricing position is not the best pricing strategy for small business owners. They miss out on revenue opportunities and worse still hand over hard-earned margin to their competitors.
Conversely, it is also common for SMEs to overcharge for products or services when a product or service is novel, new or of high value to their customers. This is called a skimming strategy and not a bad approach to take if the product or service is completely new in the market, rather than being a new version of an existing product – big difference.
When a product is new, customers perceive it as a risky purchase. They think it may not perform as expected… They think it could be faulty… they think it could create a stir with their friends and network.
A skimming strategy can be the best pricing strategy for small business owners when a product or service is completely new or novel (like software as a service). The riskiness of the new product or service is likely to overwhelm customers’ concern about price. Customers are also more likely to buy a new or novel service based on its value to them. They’ll be more likely to examine value before price, which is always the best pricing strategy for small business owners.
Also, for the small group of customers who are early adopters and like innovations, the excitement of the product’s new capabilities means they are less sensitive to price (i.e., think iPhone launches 5 years ago).
Tips for working out your pricing proposition as a small or medium-sized business owner.
The best pricing strategy for small business owners is a value-based pricing strategy.
Taylor Wells pricing and talent advisory firm highly recommends that small business owners take a phased approach to building their pricing proposition:
- Obviously, understand your costs. However, do not base a mark up on fixed and variable costs, just variable costs (i.e., cost of goods sold). Why? Because, if you use both, you will inevitably price yourself out of the market and your competitors will gain market share.
- Look at what competitors are doing. Examine market dynamics like seasonality, price cycles, quote to book or conversion; price realisation. This is a good way to get a reference point on pricing in the market. But it’s not exhaustive. You then have to understand your customers.
- Then, gain a detailed understanding of customer value drivers – i.e., how they value your products. Turn that understanding into quantified estimates on their willingness to pay for your products or services. This is called customer value driver analysis.
A value-based approach to pricing analysis is the best pricing strategy for small business owners. A value-based pricing proposition will help you take informed price changes without losing hard-earned revenue or volume. As you go through this process, many of you will find that you have either been unwittingly overcharging your customers. You may also find that you’ve been selling yourself short. This process will help find new revenue opportunities to regain control of your pricing.
Though customers are price-sensitive, they’re more likely to buy a product or service that has value to them. They examine value first before price.
A good way to get a reference point on pricing, SMEs should look at what competitors are doing. They should study market dynamics like seasonality, price cycles, conversion, etc.
SMEs should do a customer value driver analysis. They should have a detailed understanding of how customers value a product or service. Then turn that understanding into quantified estimates on the customer’s willingness to pay for a product or service.
Setting up a business is full of challenges. It requires an extensive amount of determination, patience, time and effort.
It is common knowledge that when a product is new, customers perceive it as a risky purchase. Customers think that it may not perform as expected, it may be faulty or maybe it could create a stir with their friends and network. We learned that skimming strategy is best used when the product or service is completely new in the market.
Customers that belong to the small group of early adopters that like innovations are less sensitive to price. Their excitement comes from the product’s capabilities and not the price (just think of iPhone, there are people who buy it though it’s pricey).
The best pricing strategy for small and medium-sized enterprises is a value-based pricing strategy.
See our blog here on the best implementation plan for pricing changes.
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