Small Business Success Tips - Pricing
By Don Dewsnap
Pricing in a small business is far more art than science. For one thing, small
businesses tend to change much more rapidly than larger businesses. Procedures,
product offerings, and personnel can respond almost overnight to market demands
and opportunities. Therefore the pretty and scientific charts of sales versus
price over various time periods lose their meaning rapidly. Cost analysis becomes
a tool for overall business planning, and relates very little to product pricing.
For another thing, and many small business owners do not understand this, pricing is
the least significant factor in most customer decisions. The most important factor, by
survey, is dependability, and customers will pay for it. Availability is a big part of
dependability. If you can't produce the product or service, don't sell it.
Quality is also more important than price, overall, in buying decisions. Compromising
the quality of a product or service in order to lower its price is a direct route to
losing customers. If a customer buys a cheap hammer somewhere else and the head of the
hammer flies off, he will buy a better, more expensive one next time. So only sell the
better, more expensive ones if you want to keep customers.
One more thing, before presenting the conclusions on how to approach pricing: know who
your competitors are. A small business is not competing with Wal-Mart. It is competing
with other small businesses.
Ignoring niche markets for the moment, most small businesses have a number of
competitors. These usually break into three groups: tiny, just-starting, hungry
businesses; somewhat established businesses with some name recognition and reputation; and
long-established, larger (but still small businesses) leaders in the field. A growing
small business will normally progress through the first two stages, and might or might not
be aiming to join the third, depending on the ambitions of the owner.
Group One markets on price. Group Two markets on dependability and quality. Group Three
markets on reputation and volume capabilities. The small business owner should be aware of
which group his business is in, and who his competitors are in that group, and what they
are charging for similar products.
So here are the principles of smart pricing for Groups One and Two. Group Three is
distinguished by high pricing, so they are on a "whatever they can convince the customer
to pay" basis anyway.
Group One needs customers fast. They have to generate a cash flow, and that means
investing "sweat equity" into the business, and lower prices and profit margins. This
stage cannot last very long without burning out the owners and workers, so concentrate on
producing products that are every bit as good as Group Two's products, and being just as
dependable. Then, when you increase your prices in six months or so, you will retain many
if not most of your clients. Very important: Be sure to raise your prices when you have a
solid repeat customer base. Keeping your prices at a level that barely sustains your
business will prevent your being able to invest in the resources you will need in order to
enter Group Two.
Group Two's pricing depends entirely on dependability and quality. Assuming you are
constantly improving both, your prices can constantly increase as well. If your dependability
and quality hit a plateau (which doesn't mean they can't improve, because they always can;
it only means you have decided not to improve them), then so should your prices.
The temptation bedeviling small business owners in Group Two is to underprice their
products and services, so as to gain more business and not lose customers. Giving in to
this temptation will pretty much ensure failure, as you will not be able to build up
capital for further expansion. Your intention should be to dominate Group Two, to be the
big fish in that pond. You want those customers who would prefer to use a Group One
supplier but cannot justify the cost, so they look for the best they can afford.