Make Sure the Price is Right

Pricing is something that most small businesses do in a way that’s less than scientific. Usually the owner makes an estimate of what the costs are of providing a product or service, then adds a fixed percentage and calls it “profit”. The result is a price that’s too often inadequate to cover all the costs and generate a reasonable income for the owner.

You need to maintain a watchful eye on the business environment and pick up pricing trends before they have a chance to erode your margins. You should also have a strategy in place to deal with fluctuations in everything from your own costs to the demand for what it is that you sell.

You have to accurately cost the services you provide. It’s easy to overlook the real costs of such expenses as warranties and training, but they do have an impact on your bottom line and need to be considered when setting prices.

Remember too that even if your prices don’t go up your overheads probably will. When planning a pricing strategy for six months into the future you also need to know what your costs will be in six months’ time.

There are many other factors that need to be considered before a price is set. The market itself has a bearing on prices — the rule of supply and demand is always there, and other things like fads and varying levels of competition will also play a part.

The Failings of “RRP”

The manufacturer will often set a recommended retail price, or “RRP” as it’s sometimes abbreviated on price tags. Most consumers are savvy enough to know it’s not necessarily going to be the final price at the point of sale, and trying to use the RRP as your own price is about the same as admitting you don’t understand the marketplace.

It is a much better practice, if you want to use it at all, to use the RRP as an opening price, then offer a discount. “10% off the recommended price” is one way to promote this.

Use Your Own Cost

It’s interesting to see how many businesses, especially retailers use a “cost plus” method of setting prices. “Our invoice cost + 5%” is one way of advertising this. The real problem with this is that customers are aware of such things as volume rebates and advertising allowances and the claim can fail to excite them.

You could also find that a change in the rebates or allowances you receive requires a major restructuring of your prices and market positioning.

Undercut Your Competition

There’s nothing like a good price-cutting war to make purchasers happy and vendors go to the wall. You can always sell something for less than it’s being sold elsewhere, and if you spend enough money telling the market what you’re doing you can probably increase your sales volumes.

But it gets back to the fundamental question of profitability. Is there enough profit left in every sale (not just sales at a certain volume if it’s reached) to give you an adequate return on your funds employed?

This has proved to be a self defeating practice in many industries. Cutting prices to set a new baseline also means you’ll have to cut your operating costs and provide lower standards of service.

Don’t forget that your competitors may adopt the same policy and drive prices even further down. Eventually both you and your competitors have to try to get prices up again or go out of business, and by this time raising prices will have become a real challenge.

Go with the Opposition

Another way of setting prices that is beset with dangers is to simply “shop” your competitors and charge what they’re charging. This ignores the possibility that they might be able to get away with charging less than you and the result will be a drain on your cash flow.

Consider all the other factors while you’re looking at competitors’ prices. Do they offer the same level of service as you do? Is their quality the same as yours? Do they have a guarantee that’s as good as yours? It’s not just about price.

Higher Prices, Better Standards

The optimum pricing position is to be able to charge more than the competition. This fundamentally means you have to provide more for the customer around the product or service you sell.

Price will always be a concern for customers, of course. They will only accept higher prices if they perceive that the business charging higher prices is offering a better value proposition. This can be anything from better premises, a friendlier team, a better guarantee, better after sales support or a combination of all the factors like these.

The benefits of this kind of pricing strategy are obvious. You can maintain your profit structure without risk of a price cutting war and have a better chance of retaining your loyal customer base.

In Conclusion

Your pricing strategy is critical to your success. It requires constant monitoring of the environment in which you conduct your business and accurate costing of your overheads and other expenses.

If you let others set your prices for you and just go with the “RRP” or charge what your competitors are charging you run the risk of generating insufficient profits to remain in business.

Think of pricing as part of your overall marketing and give it the time and attention to detail it deserves. You’ll see the results in higher profits and have a healthier business that way.

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Copyright 2004, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.