- Business and Employment
Product Pricing Strategy for Small Businesses
Pricing is King!
Small Businesses Often Fail Because of Poor Pricing Strategies
I consult with hundreds of small businesses every year and I consistently see terrible pricing practices.
Here's a common conversation I have. Lets use Joe who owns an auto repair shop.
Me, "Joe, how do you set your pricing"
Joe, "I charge $60/hour for labor."
Me, "What about parts?"
Joe, "I mark-up 50%." Me, "Why?"
Joe, "Why what?"
Me, "Why do you charge $60/hr and mark up 50%"
Joe, "What do you mean why, that's what they charged at the shop I used to work at."
Me, "How's that shop doing?"
Joe, "They went out of business last year and the guy I used to work for now works for me."
Me, "How much does he make?"
Joe, "About $60k per year with commissions."
Me, "How much do you make per year?"
Joe, "I don't know, whatever's left after I pay my employees, my suppliers and the government."
So there you have it, Joe's scientific pricing system. What's a better way?
How to Price for Profits
4 Basic Pricing Methods
Method 1 - Survey all your competitors for their prices and their offerings. Set your prices to be competitive with them and then back into what costs you need to make a profit. This strategy only works if your survey includes profitable shops. Getting your pricing from failing businesses could do more harm than good.
Method 2 - Calculate your costs, overhead and the profit you need and then back into the prices you need to charge to make those numbers work. The risk in this is that if you are a bad manager and your costs are too high your pricing might be too high for your customers.
Method 3 - Pick a high price and then negotiate with your customers when you need to. This strategy is very common in the home improvement industry. I don't recommend it since your customers are usually a poor source of honest feedback on pricing and in addition, there will be lots of customers who won't come back at all.
Method 4- Identify the 2 higher priced, successful competitors, and use their pricing as a baseline for your pricing and then figure out how to perform your services at least as well as they do with costs that allow you to make a reasonable profit. This method is where you will test your ability to be honest with yourself. Charging high prices takes a lot of smarts and operating excellence but it is done all the time and many customers are happy to pay high prices for perceived quality. How do you think the sell Rolex watches?
Pricing Strategy is Not a Once in 5 Year Project
A good business owner keeps up with their pricing strategy almost daily. In even a small business their are dozens of opportunities to improve your profits through smart pricing.
Start today....take a look at your 3 highest volume products. Research suppliers and determine how to lower your cost of that item by 5%. Talk to your suppliers like they are partners, you might be surprised about their willingness to help you...especially if you are known to pay your bills on time.
Once you've taken a hard and honest look at your costs it's time to take a look at your selling prices. Anyone who marks-up everything the same is losing money.
If you mark up a $100 item 50% that's $150 selling price. If you change the mark-up to 60% that's a $160 selling price or a $10 increase. Your customers might have a problem with that. But you also sell items that cost $1, you mark them up 50% and charge $1.50, if you mark those items up 70% it's a 20 cent increase. Will your customer leave your store to go somewhere else to save 20 cents?
Pricing products and services for small businesses is 1/3 science and 2/3 art.
Smarter pricing means better profits.