If your goal is to build a thriving and sustainable business entity (and I know that it is), it’s imperative that you determine the right price point for the goods and services you sell. Establishing the most advantageous price range is an element of your marketing strategy. That means your pricing strategy must align with both the brand identity and market position occupied by your products and services and also be acceptable to target customers. Understand where your company is—and where you want it to be—in terms of perceived brand value. Do you consider your company to be a discount option, middle-road, or a luxury option?

Pricing is integral to business profitability and a cornerstone of business success. Experienced business owners and leaders agree that a pricing strategy can make or break a company—set prices higher than what customers care to spend and sales are lost; set prices too low and revenue potential is not achieved.

Surely, you’ve noticed that pricing has been a sensitive topic over the past few years, as inflation that (allegedly) topped out in 2022 caused the prices of numerous goods and services to rise as business owners sought to protect their profit margins from increases their organizations faced for the raw materials, acquisition costs, transportation and other expenses associated with bringing goods and services to market.

Unfortunately, readers of this post—mostly, Freelance consultants and SMB owners—often lack the financial cushion to withstand all but the briefest periods of economic adversity. Enterprise companies and other well-capitalized entities are better equipped to absorb both the rising costs of product production or acquisition and customer push-back associated with higher retail prices. Instead, the “little fish” are squeezed between inflated business costs and customer reluctance to accept price increases. Their reluctance may stem from budget cuts that inhibit B2B sales and in the B2C sector, the problem can stem from wages that may not have kept pace with inflation. Both scenarios can lead to prospects who second guess their need to spend and result in shrinking sales revenue.

As was discussed in last week’s post, being in business is all about solving problems, is it not? In order to survive, companies large and small must at least generate enough revenue to cover operating costs. Increasing the price of your goods and services might make you nervous; it may appear that you’ll lose a customer or two and that is worrisome. Keep in mind that customers are aware of inflation. They also understand that you are in business to make a profit. Optimizing your pricing strategy is the best defense. Offering a simplified version of your products or services can perhaps be an attractive option that may allow you to retain price-sensitive customers.

Calculate production/ acquisition costs

Let’s start with the math: (Price – cost) x quantity = profit. Before pricing your products or services, you must calculate the time and money you spend to obtain or create them. Tally the costs of each item purchased and each hour spent to produce, acquire, or create each product or service that you sell. So, if you purchase at wholesale products that you resell, calculate the costs of buying and shipping those items. If you manufacture the products yourself, or outsource the production/manufacturing, calculate the costs of the materials, manufacturing expenses, employee wages and the time you devote to production tasks.

Likewise, if your business is based in the knowledge economy—maybe you customize business strategies, or you create sales training workshops that you present in video classes—to the best of your ability, calculate the number of hours spent designing your intellectual property and assign an hourly rate to yourself so that you can determine the wholesale cost of your work (keep in mind that you’ll bill your clients at retail).

Once you’ve confirmed the amount spent on obtaining or creating your products or services, you will have discovered a vital piece of financial info—the break-even point, which represents the minimum selling price required to cover the costs you’ve invested to obtain your products and services. For info on pricing tools that might be useful for your business entity, click: https://www.symson.com/blog/best-competitive-pricing-tools

Benchmark against key competitors

Both industry statistics and the pricing habits of key competitors can provide guidance when evaluating potential pricing strategies. Within each industry, there are typical standard mark-ups and profit margins that are recognized as normal ranges. This info can help Freelancers and SMB owners to first, understand if their product/ service acquisition or development costs are too high or low relative to the typical selling price range and also where, or if, their selling prices fall within the typical price range for that product or service.

Further confirmation can be gained by investigating the pricing of two or three direct competitors, to discover an upper and lower price tolerance for your customers and identify a pricing sweet spot. In other words, for products similar to what you offer, if you discover that the most expensive competitive price in your market is $300 and the lowest is $100, that’s a convincing indication of the price range your customers accept and you can therefore confidently price your offerings somewhere between those values, guided by your production or acquisition costs and your company’s brand identity.

Emphasize value, not price

Benchmarking the pricing of certain competitors can be instructive but you should avoid copying what your competitors do. Competitive pricing intel is best utilized as guardrails that help you discover a price range that your customers can be expected to accept. Believe that your products and services can stand on their own merits—that is, the value your brand delivers. Your company and its products and/or services are more than just a price tag, more than a commodity.

Too many Freelancers and SMB owners attempt to win customers by being the cheapest game in town. This mindset nearly always leads to underpricing—undervaluing— your products and services and your company as well. When you choose to primarily compete on price, it is unlikely you’ll ever preside over a thriving entity. It’s much more likely that you’ll be trapped in a race to the bottom as you compete with those who are willing to undercut your price whenever necessary. According to spellbrand.com, “by being the cheapest or lower priced, you attract the wrong customers. You attract customers who make decisions based on price and not value.” Leave the price wars to Walmart and focus instead on how much customers might be willing to pay once they understand the value associated with your organization.

When you compete on value, you will attract and interact with prospects who respect you, your professionalism and abilities, and your company. The moment you decide to emphasize the value, you will attract those ready to invest at the level of service or product you can deliver. 

On that note, along with a thrifty vision of your product or service to attract price-sensitive prospects, develop also a VIP up-sell category in each product or service that you provide because there are always customers willing to invest in the very best you offer. Including a premium option of your products and services is a quick way to add even more revenue to your business income streams. When you are playing the long-term game as an entrepreneur, you want the best.

Thanks for reading,

Kim

Image: LazingBee