How to work on a pricing strategy for your small business?
Pricing Strategies for Small Businesses
It is quite clear with all the facts and statistics available that small businesses play a pivotal role in the UK’s economy every year. A study revealed that small businesses accounted for about 99.3% of all the private sector businesses in the UK at the start of 2018, which is about 5.6 million small businesses operating in the UK.
Due to such intense competition, small businesses can only compete by hiring the best employees, which requires having to offer high wages and lucrative benefits, this is usually impossible for small businesses with limited budgets and, therefore, they end up being run by the owners only. With no or limited employees on board, such a business is bound to suffer from losses or negative performance. One way a small business can grow quickly and afford an effective team is through effective pricing, which means higher profitability and more money to utilize for growth.
Most small businesses for the fear of losing customers price their products or services really low without thinking about how this impacts their bottom line, they engage in baseless and faulty pricing methodologies or hit and trial strategies, that lead to either very little or no profitability. An ideal pricing strategy would be the one that fits according to the nature of your product, the nature of your business and considers the basic supply and demand concept whilst pricing the goods or services.
What is a Pricing Strategy?
Pricing strategy is the methodology adopted by businesses to set an ideal price on the goods and services they plan to provide after a detailed analysis of the different financial and marketing aspects. Pricing strategies may be subject to a number of factors, for instance, market competition, input costs, consumer’s willingness to pay, production costs, fixed and variable costs, etc.
A good pricing strategy not only promises high profits to the business but also assists them in maintaining their brand name, maintaining strong control over their market share and preventing other competitors from taking their spot in the market.
Before you start working on your pricing strategy it is very important to understand things like breakeven points, markups, margins and contribution margins. You could ask your accountant or find an accounting firm with qualified chartered accountants who can help you understand the key process around designing prices for your products.
10 Pricing Strategies for Small Businesses to Consider:
The pricing of a product is dependent on the strategic and financial decisions taken by the price setters. Considering this, we have listed down 10 pricing strategies which small businesses can capitalize on:
Economy pricing is a very popular strategy among discount retailers and retail food businesses. This strategy employs cost-cutting practices before the finality of the product.
By cutting down the marketing and production costs effectively, you can offer your product at a lower price, to grab the attention of price-sensitive customers in the market. With this strategy, companies are most likely to gain profits even at a reduced price, due to a significant cut down on marketing and production costs.
Unlike large businesses like Tesco, Asda, and Walmart, economy pricing is not suitable for small businesses, as the volume of their sales falls way behind those of larger companies which can create difficulties in employing cost-cutting practices on the production.
You need a good bookkeeper and a great bookkeeping process, a competitive management accountant, proactive tax accountants, and a great production team to improve productivity, reduce costs and therefore increase profits while reducing prices.
After finalizing a new product, businesses struggle to enter the target market successfully. With no reputation or brand awareness for your product, it becomes hard to compete with similar products offered by your competitors in the market. At this stage business can use a market penetration strategy, which means offering the lowest price in the market, keeping in mind the price offered by the competitors, to penetrate the market quickly. You may raise your prices later after you have successfully entered the market. This is what we refer to as the penetration strategy.
For instance, the lowest price offered on your product by other competitors is £15, now by utilizing the penetration approach, you will offer your product for £12. Setting the price lower than the rest gives you the opportunity to attract the attention of the consumers towards your product and thus helps you pave a smooth way into the market. This strategy also helps small businesses increase their brand awareness and customer loyalty.
Utilizing this strategy might result in the business suffering initial losses, but with the increase in brand awareness over time, you can drive up your profits at an exponential rate by gradually increasing prices or by reducing costs to increase profits.
Price Skimming Strategy
Adopted by many businesses to maximize their profits on new products and services, price skimming is a very rewarding strategy, but only if implemented effectively. This approach allows businesses to set a high price on their new products for a certain period of time, just to create a perception of exclusivity. Soon after the emergence of other similar products in the market, the business gradually reduces the price over time and instead introduces something new.
Charging higher rates in the initial phase can help businesses reap maximum profits from high-end customers and then by lowering the price, small businesses can successfully be able to attract price-sensitive customers on their sales radar. If implemented effectively, small businesses have an opportunity to retrieve their money spent on the production and development of the product, in the very beginning and cover their break-even point, after which every sale is a profit.
By adopting a premium pricing strategy, businesses offer the highest price possible for a product, for two reasons, either their product is unique or they have a competitive advantage on that product. Whilst adopting the premium strategy, you must ensure that there is no other product that can compete with yours in terms of features and quality.
The key to reaping benefits from a premium pricing strategy is that by creating a perception of value, you have to make your customers believe that your product is the first of its kind and the price you are offering is worth it. However, you need to ensure that your product packaging, marketing strategy, product quality, and uniqueness collectively justify the price you are offering.
Giants like Tesla and Apple adopt premium pricing for their product, as they know that they can easily manage to attract swathes of customers with even an extremely high price offer. They are only able to employ this strategy efficiently because of their extensive market reach, and ability to successfully create a perception of value among the consumers that their product is one of its kind, as compared to other products in the market.
An accurate financial model and budget can be very useful for a business trying out different pricing strategies, speak to your business accountant to help you get things in order before you pursue your strategies in real-time.
Bundle pricing is about making your customers believe that they gain more value by purchasing multiple products in the form of a deal as compared to purchasing the products separately. By adopting bundle pricing, you offer multiple products together at a rate to the customers which is lower than the amount that results if those products are sold individually.
Bundle pricing is the most common example of pricing that you will come across at almost every restaurant and store in town. You will most likely buy a meal of burger, fries, and drinks than buy these products separately.
This strategy is extremely successful in increasing the value perception in the eyes of the customers. Though many businesses employ this strategy on a slow-selling product business should realize that by adopting this strategy they can reduce their inventory quickly over time, and replace old non-value adding products with new ones.
Psychological pricing is all about understanding the customer’s psychology and implementing the prices according to their psychological impulses. The key feature of this strategy is based on a theory that numerical figures play a critical role in influencing the customer’s decision to purchase a product or not.
For instance, the price you set for a smartphone is £199 instead of £200, even though the difference is extremely minute, but £199 will be able to attract more customers, just because you know that the customers focus more on the first digit on the price tag than the others.
Offering discounts on your products is definitely a very good way to drive up your sales. Promoting your product by offering discounts on the price is what we refer to as promotional pricing. For instance, you launch your own clothing designer brand and you offer coupons or vouchers which they can use to buy your clothing products at a discounted price.
Promotional pricing can also be of a short-term nature, for instance, offering discounts on special occasions or events. You may offer 50% on your clothing line on Christmas, or ‘buy one get one free’ offer on thanksgiving day. Promotional pricing is aimed at thrilling and exciting the people about your products at discounted prices, and making them feel that they are missing out on a big offer. It is all about playing with consumer’s psychology.
In order to understand the promotions you can offer, it is important to understand the gross margin, the fixed overheads and other relevant KPIs which can help you offer promotions without a negative impact on the business’s bottom line. Our team of in-house startup accountants can help you build the relevant pricing models which will help you offer discounts without significant impacts on your bottom line.
Value pricing can also be referred to as the ‘customer-focused pricing’ . This strategy comes to the rescue when your sales are not driving up or remain stagnant due to external factors. These external factors may range from recession, inflation or rise in competition. You take advantage of value pricing by providing an enhanced value on your products to drive your sales up
Value pricing is a very brilliant strategy to make your customers feel satisfied with the money they spend. It is based on the theory that customers will not care about how much the product costs as long as they are receiving maximum value on the money they spend.
The fashion industry in one example where value pricing is the most prevalent. Some of the other industries which utilize value pricing include the pharmaceutical industry, cosmetics, and personal care.
Geographical pricing comes in handy when you decide to expand your business overseas. Geographical pricing considers the location from where you are operating and is also subject to local taxes, tariffs, office rent in the new location and the shipping costs incurred.
Remember, that when setting prices, it is very important to consider the shipping costs in delivering the product to the buyer as the freight constitutes a large portion of the total variable costs. Your shipping costs depend upon the quantity of the goods, weight and the distance from the buyer.
Demand and supply may also influence geographical pricing, for instance, you are a seller of heat appliances such as heaters, blowers or geysers. You take advantage of this strategy by setting a high price on heaters during the winter season because you know that the demand increases whilst you set low prices during the summer because of the decreasing demand.
In captive pricing, businesses tend to generate profits by placing different price levels on different components of a product. When you deal with a product that can be renewed or updated, captive pricing is the best option you can avail of.
For instance, you deal in replaceable razor blades, you know that customers would rather replace the blade instead of buying a new razor. It is based on the notion that customers will always purchase the components of a product to retain the value of the core product, in this case, the razor itself. Thus, by adopting value pricing, small businesses have the advantage to reap higher profit margins than they would if they sold a regular product.
Clear House Accountants are specialist Accountants in London, our highly trained and experienced in-house startup accountants, tax accountants, and business accountants make sure that you have smart solutions, effective strategies and intuitive models to help you make the right decisions while saving money and growing your business.
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
- Helping businesses gain insights from their business data
- Providing complex tax and accounting solutions
- Helping businesses prepare for complex industry developments and changes
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