For small businesses, there are many important aspects to take care of, including pricing strategies that are both competitive and profitable.
Although many small business owners tend to base their prices only on their competitors’ prices, there are in fact other pricing strategies that are much more effective.
Finding these strategies, however, can be a very difficult task, especially with so many pricing strategies to choose from. That’s why I’ll discuss today the five pricing strategies your small business needs in order to succeed.
Customer Perceived Value (CPV)
Customer Perceived Value pricing is based on the value that your customer places on your products or services based on the perceived benefits.
This will require you to do some research or surveys. In order to calculate CPV:
CPV = Total Perceived Benefits – Total Perceived Costs
The CPV here can be seen as the net benefits of your products or services.
For example, let’s imagine your business sells handmade leather bags. Your customer perceives the benefits (as a monetary value, including any emotional benefits) as equal to $500, and views the total costs at $350.
The CPV is $150 and you have the option of charging anywhere from $350 – $500. If you charge lower than that, you are undercharging, and any more than $500 and you will lose the customer.
With this straightforward pricing, it has also been shown to increase the rate at which your invoices get paid, as the customer has higher satisfaction when prices are within the range of net benefits (or CPV).
This is another of the pricing strategies that do not take other businesses into account. In this pricing strategy, you are simply determining your overall costs to produce the products or services and adding your own markup.
Your costs will come in two forms: fixed and variable. Variable is important, as it is the cost directly related to the production of one more product or service, such as materials, direct labor, etc. Your fixed costs are things such as rent, utilities, fixed salaries, etc.
When you have your costs per unit, you should add a markup, for example, the standard 30%, to get your price. For example, if your costs come to $30, with a 30% markup, your price comes to $40. That way, you ensure a profit, although you are ignoring your competitors’ prices.
The way most small businesses do competitive pricing is, unfortunately, wrong. They often undercharge for their products and therefore they cut into their own profits.
In order to do competitive pricing right, you need to follow two steps.
First, you need to take a survey of all your competitors’ prices, not just your main competitor’s, and then take the average of those prices. This is much closer to the market value of your product.
Secondly, you need to make sure that your cost structure is similar to your competitors’. It would be illogical for you to only take your competitors’ prices into consideration without first understanding their costs compared to yours. When you see yours is similar, then you can compete on prices.
If your costs are lower, you can go lower on the price. If your costs are higher, your price will have to be higher, but you can offer benefits to your customers in other ways.
Charm pricing is a pricing method based on the psychology of your customers. Here, you are taking a round number and dropping it by 1 cent to get a price that ends in 9 (e.g., from $4 to $3.99).
Although practically it is only a 1 cent decrease and basically without much value, to the brain it is a much larger difference in price.
That’s because the brain also focuses in on the left-most number and makes it more significant. Although $4 to $3.99 is only a 1 cent difference, to the brain it is the difference between $4 and $3.
In an experiment by MIT and the University of Chicago, they tested this pricing strategy on women’s clothing. The same clothing prices were set at $44, $39 and $34. Although the $34 clothing should have been the best-selling item, it was, in fact, the $39 clothing that won.
Another of the psychological pricing strategies is prestige pricing, by which the price is actually increased, not decreased. It is nearly the exact opposite of charm pricing. Here, you go from a ‘charm price,’ like $23.99 and raising it to a round number, $24.
This is effective for luxury goods where practically doesn’t play the most important role. Here, the round number feels more right and exclusive compared to the ‘charm price’ which is more competitive but also more inclusive.
As I mentioned above, this particular strategy should only be used for luxury goods where price is not the only factor. The brand, its exclusivity or the high CPV should also factor in here.
These are only some of the many pricing strategies available. However, they are the most effective for small businesses.
Although it is best you don’t choose all of them at the same time, you should definitely calculate your costs and determine which pricing strategy will help boost your business.