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Small Business Guide to Pricing Products & Services

Posted by Busey Bank on May 11, 2021 9:56:40 AM
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Pricing products and services competitively while still managing to clear a profit may prove one of the biggest career challenges an entrepreneur will face. Though every market sector has unique circumstances, a few ground rules apply across the board, no matter your trade. Here are some basics:

  • Don’t set prices until you conduct market research. Besides scoping out the local scene, examine pricing structures in similar markets nationwide. This is particularly important when your product or service is new or unique to your market.
  • Take overhead into consideration. Labor, rent, staff, marketing costs and materials will all affect your price structure. Additionally, consider any government and trade regulations, possible service needs following a completed sale, the manufacturer’s suggested retail price and potential consumer concern if prices are too high.
  • Choose the best pricing structure for you and your product.
    • Cost-Plus Pricing, which entails prices set on total production costs plus a certain profit margin, is the most basic and widely used system.
    • Value-Based Pricing centers on what you think customers will spend. If your firm provides a unique, hard-to-find service or product—hand-crafted artisan jewelry, for instance—a value-based system could serve you well.
    • Price Lining strategies involve keeping all goods and services within a specific price range, such as hair salons with $15 cuts and tax services for $50 or less. Advantages can include reduced inventory and storage costs, as well as customer convenience.
    • Multiple Pricing works well for sales and clearances—two shirts for the price of one, for instance—as well as for many services (e.g. steam cleaning two rooms of carpeting for one low price)
  • Position yourself strategically in your market.
    • By making your prices comparable to those of a competitor, you level the pricing field. This allows you to promote amenities such as superior customer service and product excellence—without sacrificing revenues.
    • Undercutting your competitors is an option, but lower profits means reducing operational and inventory costs, as well as limiting customer amenities.
    • Pricing above the competition is an option when your clients value amenities such as convenience, exclusivity and exemplary customer support over cheaper goods and services. This strategy is worth trying if your market consists of more affluent consumers or your company operates in a higher-income area.

Finally, whatever model you establish, make sure you are offering your clients and customers realistic options in the current market. Fluidity is critical. Track sales and revenues for two or three months, taking note of your system’s strengths and weaknesses and don’t be afraid to adjust as often as necessary.

Looking to start a new business, buy a franchise or remodel your business space? Busey’s team of SBA lenders will guide you through flexible financing options for your business. Let Busey help you elevate your business to the next level.

Topics: Business

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