Pricing: It Isn’t Sexy But it Pays the Bills* – Part I

Small business owners are often stymied by the concept of pricing. The other elements of Marketing; namely, Product, Promotion and Place typically receive more attention to the detriment of many a business. Since this is such a critical topic for business success, Cybertary will be featuring a different aspect of pricing over the next several newsletters. We will cover the factors that contribute to setting your pricing, the different strategies you may choose to employ, and some of the pitfalls and things to avoid in your pricing strategies.

In this, the first article in the series, we are taking time to cover the basics of Pricing.

Whether you are selling a service or a product, using a brick and mortar storefront or a glitzy on-line presence, the one fundamental lesson in business is ‘if you don’t make a profit, there really is no reason to be in business’. The business of business is making money.

A pricing strategy that does not support this axiom is a surefire way to go out of business. Charging too much for the goods or services you have to offer and you may not be able to attract business to your door, whether that door is a physical one or a virtual one. Charge too little and you may not be able to cover the costs of what it takes you to deliver the product or service, let alone allow for a profit.

Your pricing strategy not only impacts your ability to cover your cost structure, but it has further reaching implications on your ability to grow and sustain your business model, including the longevity of the company.

Of the 4 P’s of Marketing, Pricing is the only one that generates the revenue, moolah, vig. The other P’s are investments in the business for a later return.

Here are some key factors for consideration when you develop your small business pricing strategy:

What are my competitors doing? What is their competitive advantage? Should you undercut them or offer a more compelling value proposition to counter the difference in your price?

Who is your target audience and what are they willing to pay for your goods or services? This takes research, some due diligence and cogent thinking into truly defining your target market. Only after you know who you are trying to attract and appeal to will you be able to answer this question.

Will you cover your costs? Like the second point above, you need to really understand all of the cost factors in running your business, not just the direct cost of that widget, but your employees, taxes, distribution, marketing and promotion, etcetera, etcetera, etcetera. I caught an episode of NBC’s new reality competition series ‘AMERICA’S NEXT GREAT RESTAURANT’ the other day and the “Investors” (Bobby Flay and others) were trying to drive this point home to the cheftestants with the pricing for their food carts. They had $300 to spend on food and supplies, but their pricing for lunch was all over the map. In one example, the cheftestant thought her cost of goods sold was $1.88 so she was comfortable in charging $6.00 for the meal; the problem is she did not factor in that the costs of running the mobile kitchen (gas, employees wages, taxes, benefits, parking, permits, insurance, paying herself) far-exceeded the $4.12 of what she viewed as “profit”. Hint here: It isn’t profit until after you have paid ALL of the bills (and that includes paying yourself). Now, having said this, don’t expect to make your profit and be cash flow positive on the first sale – remember the key is research and balance.

How will you demonstrate that you offer added value with your product or service? People buy from people that they know, like or trust and who are going to be around when they need you. If you are going to bargain basement your price, you risk degrading your perceived value and your overall likelihood of staying in business.

The key to setting your pricing strategy is to do your homework and keep your eyes on the prize. Be open to revisiting your prices as the climate for your products or services shifts. There was a memorable scene in Mr. Mom, where Caroline (Teri Garr), back in the advertising game after years of being a stay at home mom, was pitching a client on temporarily reducing the cost of Schooner Tuna by 25 cents a can. She won the business and more importantly, her client stayed in business during an economic downturn.

*Many thanks to JoAnn Forrester, President, S.I. Business Associates, for sharing her wealth of insight and knowledge as well as the title for this series.