Small Biz: Low Price Is Not the Best Price

Price is the monetary value of a product or a service rendered to customers. It definition is varies from one perspective to another. Accounting guys will tell you that it is simply a product of cost + mark-up or profit.

Marketing guys (just like me) complicate pricing further (and for a good reason!). There are different pricing strategies based on market conditions, industry, and number of competitors.

Pricing is very important to sustain market presence and manage profitability of your business. It can even function as a barrier against competition.

For a small business, pricing is much more complicated and somewhat limited compared with big corporations. However, many small business owners opt for LOW PRICE STRATEGY without fully analyzing the situation, a complete suicide if you ask me. Unknowingly, what small business owners perceive as their competitive advantage is really their inherent weakness!

Why?

Large-scale companies and established market leaders have deeper pockets and economies of scale. Simply translated, they can always match whatever lower price you set for your products or services. Companies like Wal-Mart or Target can absorb losses without affecting the overall financial performance. And these companies really hate competition!

What happens next is pretty much predictable – either you go out of business or engage in a price war. Either way you will lose money, it’s just a question of how much you will lose.

So what is the Best Price then?

While there is no fixed rule about pricing strategy for small business, there are some important guidelines and tips to serve as your intelligent basis.

Although I need not mention this, competitive analysis is vital in defining your price levels. You have to check the price range of your target competitors and if possible, gauge the price levels customers are willing to purchase your products.

The thing is you have to dig deeper than what is available. Think strategic, always. I mean, evaluate the entire portfolio or all products offered by competition. Match it with your offerings so you can easily identify your strengths and weak spots.

Price elasticity of the industry is another factor in your analysis. The Encarta dictionary defines it as “way demand responds to price changes: the extent to which demand responds to a change in the price of goods or services.”

It reveals the behavior of customers when facing price increases or reduction. Different industries react differently. This is very important if you plan to increase or decrease your retail prices. In some industries, increase by $1 results to 20% reduction in sales!

Create Differentiation to Sidestep Price Wars

You need not engage in a war of attrition but focus on creating differentiation. In marketing, it is referred to as Unique Selling Proposition (USP) or what makes you different from others. Remember that price is generally a weak USP so find other ways.

Attach value-added or add-on services to your business. It can be better customer service, 24-hour operations, loyalty programs, or product availability in different channels not occupied by competition. Some rely on hospitality or exotic experience! This will negate any price cuts or massive discounts employed by bigger companies. Product loyalty is the key!

Cull. Reassess your business and identify products that you can do without. If you are keeping 10 variants of soap, only 3 might be profitable. So, scrap the remaining 7 if do not have strategic importance. Make it a habit to rank your products or brands in terms of contribution to business and monitor its relevance in the market.