One of the most expensive mistakes any small business can make is to get the price point wrong for its products or services or fail to communicate the value of its offerings. If you get your pricing strategy right, your business can thrive in a world of fierce competition and relentless commoditization.
Here are a few ways small businesses can make smarter pricing decisions:
1. Manage the pricing cycle
Competitor activity, fuel prices or seasonal activities will always have some influence on how you can and should price your products. But you should also take a long-term view and try to shape your product pricing in a strategic manner. Look at your input prices, the price sensitivity of your customers, and the strength of your value proposition. Would it be better to gently raise prices and deliver more value to customers so you can get a better profit margin? Or should you look to cut internal costs and find low-cost suppliers so you can offer the cheapest goods in town and get higher volumes?
2. Focus on your pricing architecture
Think about the products and services you offer and how they are positioned relative to one another. Price your offerings so clients will want to purchase the best option for their budget. In other words, if they look at your basic car model and the next one up, the features and pricing should be attractive enough for them to want to spend more if they can afford it.
For example, not every prospect can afford the flagship model in the BMW or Audi product ranges, but each manufacturer offers features and prices aimed at getting a higher transaction value for each deal. In some markets – particularly consumer technology – features in the best products generally become affordable to everyone over time.
At one point, only high-end smartphones had 4G/LTE connectivity, large displays and good cameras. Now most mid-range smartphones have these features, while expensive phones have features such as 4K screens and 20-megapixel cameras. Look at how to keep the luxury or early adopters happy, while giving more value to lower tier users, too.
3. Use decoy prices
Pricing is about understanding the ways in which people make decisions. One example is how contrasting one price with another can get a consumer to go for the option you prefer. Restaurants often use this trick: they know many people will opt for the second most expensive bottle of wine if there is a massive price gap between it and the most expensive. Of course, the profit margin on second-best will still be very good.
When The Economist a few years ago offered subscribers the choice of an annual online subscription for $59 or a one-year print and online subscription for $125, 68% chose the cheaper online subscription. However, after it added a third option of a print-only subscription for $125, 84% chose the online-print combo deal because it seemed like good value by comparison.
4. Look carefully at bundled versus a la carte pricing
Depending on what you’re selling, putting together bundles can be a great pricing strategy. An obvious example is a fast food chain that offers a chicken meal, including:
- A high-value piece of fried chicken that is the most expensive part of the offering to produce.
- An item such as rice or chips which the consumer sees as a nice-to-have rather than the main attraction, and which is cheaper for the restaurant to purchase.
- A low value extra to round off the package such as a drink.
Such bundles serve multiple purposes:
- They create a perception of value for money for the mass customer with the most typical needs or tastes.
- They set prices for a la carte products for customers with more niche tastes or specialist needs.
- They increase the transaction size without necessarily increasing costs.
A la carte pricing can give context to the bundled deal and provide upselling opportunities for customers who want something different to a standard bundle.
5. Be smart about how you communicate price increases
Communicating a price increase to a customer is one of the trickiest elements in pricing. If you are not transparent, customers will feel cheated and become angry. If you are too direct, they will start focusing on the cost rather than the value or the utility of the offering you provide.
Some best practice approaches to communicating a new price:
- Focus your communication on the new price rather than the old.
- Reinforce the value you are delivering, especially if you have, over time, made popular changes and additions to the product you are selling.
- Announce a price increase slightly before it takes effect to decouple the new price from the customer’s purchasing decision.
- If your market is price sensitive, look at the possibility of downgrading package sizes or features to keep the price constant.
- Find ways to add value without increasing your cost. For example, upsize container sizes as you increase prices. This works well if you are selling a cheap commodity (think machine soda, for example) where a slightly bigger portion won’t add much to your cost.
By Abiola Adegbite, Senior Sales Director West Africa at Sage