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The Best Pricing Strategies for Your Small Business

Business Development

Better pricing is key to the success of a small business. In fact, a 1% increase in price can boost profits up to 11% according to a study by McKinsey.  

As the leading digital marketing agency in Miami that specializes in helping small businesses succeed online, we are going to share pricing tips and strategies that will set your business up for success.  

Pricing Tips for Small Businesses

1. Avoid Low-Price Strategy

digital marketing agency Miami recommends that small business avoid pricing their goods too low.

Small businesses should avoid using the low-price strategy at all costs. The last thing you want is for your customers to see your goods and services as a commodity.  

You might think that being the cheapest among your competitors is the best way to attract customers, but in reality, you're pushing them away.  

Having the lowest price in the market will shroud the value of your products and services, and consumers will think that your offering is inferior compared to others.

Plus, other bigger companies with the ability to further lower their cost can easily take over your segment and permanently damage your business.  

As the leading digital marketing agency in Miami, we suggest that before pricing your goods, analyze the following variables first:

Price ceiling or price cap: The highest price at which you can sell your goods and services. This is usually set by the government to protect consumers by ensuring that prices do not become too expensive to bear. You can determine the price ceiling for your offerings by surveying your customers and asking experts.  

Competitive analysis: When pricing your goods, it’s crucial to consider your competitor’s pricing too. Don’t just look at the amount on the tags, analyze the whole value of their offering and the market they’re serving. Are they catering to price-conscious individuals or a wealthy niche? What is their unique value proposition?

Price elasticity: You need to know how sensitive customers are to changes in the price of your products or services. Will the demand for your products go down if your price increases? Usually, products that have an immediate response to price changes are those considered non-essentials or those that have many substitutes.  

2. Avoid Price Wars

A price war is when you and your competitors fiercely lower each of your prices to weaken one another in the hopes of capturing a greater market share.  

For the average company, a 1% drop in price can cut down profits by up to 12% - 15%. This rarely works out in favor of small businesses so you should never engage in a price war.  

Here are some tips on how to avoid a price war with your competitors and maintain profitability:

  • Evaluate your competitors’ actions before responding to avoid misreading their intention. If your direct competitor lowers their price, find out if this move is a long-term strategy or an attempt to get rid of their old product before launching a new one.
  • Communicate your strategy by releasing an official statement or posting on the company’s official social media page. By making your intentions clear, you can prevent starting an aggressive price competition.
  • Understand how sensitive your customers are to price change and what their price acceptability range is. What are the price trade-offs your customers are willing to make when a new player enters the market? Do your research and figure out the short-term and long-term impact of alternative pricing strategies on your audience.  
  • Minimize price competition by responding to aggressive pricing moves quickly and consistently.  

3. Do Pricing Market Research

Marketers doing market research for a small business' pricing strategy.

Pricing research is the process of gathering information about your customers, specifically on how they respond to price changes and the psychological effects of different price points on demand.  

Doing this will allow you to make informed pricing strategy decisions when setting prices for your goods and services, and adjust them when necessary.  

Research also helps you understand:

  • Your future customers’ spending habits.  
  • How certain prices will impact your revenue.
  • The perceived value of your brand and company.
  • The optimal price point to maximize profit.  

4. Do Not Overcharge or Undercharge Your Customers

Many small businesses end up competing on price alone when they think that their products or services are common or of low value to consumers.  

This type of pricing strategy will only make you miss out on revenue opportunities and even hand over a higher profit margin to your competitors.  

When you undercharge, it means you're running a business with little to no profit.

Conversely, SMEs also tend to overcharge for products or services when they think it’s new and of high value.  

If your product is indeed new in the market, rather than being a better version of an existing product, you may charge your customers the highest initial price that they're willing to pay and then lower it over time as competitors enter the market. This strategy is called price skimming.  

But, if your offering isn’t novel, a high price point will turn your customers off and drive them away.  

Recommended Pricing Strategy for Your Small Business  

Recommended pricing strategy for small business.

Once you understand your customers' demand for your offerings, their price sensitivity, and what their price acceptability range is, review your costs and profit goals to inform your choice of a pricing strategy.  

Here are the best pricing strategies for small businesses according to your trusted digital marketing agency in Miami:

Value-Based Pricing

Value-based pricing is when you price your products and services at a rate that your customers are willing to pay. Instead of calculating production costs and applying a markup, you charge your customers based on their perceived value of your offerings.  

Value-based pricing is ideal if your goods or service meet the following criteria:

  • The demand for your product or service is so high that lowering or increasing its price would have very little-to-no impact on unit sales.  
  • You want to promote your product or service as high-profile and exclusive.  
  • You serve a highly competitive and price-sensitive market.
  • You have value-added services and other add-ons that enhance their value and functionality.  

Using a value-based approach to pricing will help you generate more revenue at higher margins while beating your competitors in the process.  

Penetration Pricing

Penetration pricing is when you set an initially low “introductory” price upon entering the market to entice customers to purchase, then gradually increase it as your market share grows.  

As a result, you can quickly capture a substantial amount of market share, create brand loyalty, generate demand, and drive your competitors out of the picture.  

Penetration pricing is suitable for you if your products or services have little product differentiation from competitors, their demand is price-elastic, and you serve a mass market.  

Premium Pricing

Premium pricing is when you charge significantly more than the original market price of your goods and services to create the perception that they’re far more superior compared to other competing products.  

This is commonly used in the fashion and luxury goods market. A good example of this is Rolex. Although it uses precious materials and skilled craftsmanship for production, at the end of the day a watch is still a watch.  

The difference between Rolex watches and other cheaper watches that function just as well is that their premium price reflects their worth as a status symbol.  

People pay a premium for Rolex because it shows how rich and successful its wearer is.

Competition-Based Pricing

Competition-based pricing involves setting your prices at the same level or slightly cheaper compared to your competitors. This strategy is suitable for you if your products and your competitor's products are the same, or in markets where products are priced similarly, like eggs and bread.  

This strategy is also useful if you’re new to the market and don’t have enough data to understand the best price for your customer base. You can use competitor-based pricing until you acquire enough customers to generate data and conclude the most suitable price point for them.  

Psychological Pricing

Pricing tricks can encourage a consumer to buy your products and services. There are two major forms of pricing, and which one you use is going to depend on your target audience:

  • Charm Pricing is when you use prices ending in .99. Consumers don’t round up prices when buying, so they’re likely to make the purchase as if it was one dollar cheaper. That said, this trick often makes consumers stop for a second to contemplate the purchase.
  • Rounded Pricing is when you use prices ending in .00. This is often used by luxury brands, who are hoping to appeal to a target audience who is unconcerned with bargains. This form of pricing relies on feelings, since people don’t have to contemplate the purchase in the same way.

You can use both charm pricing and rounded pricing to attract different types of customers.  

Bundle Pricing

Bundle pricing is when you sell your goods and services in a bundle for a lower price than you normally would if you sold them individually. This creates a perception of greater value.  

What’s great about this strategy is that you can use it to clear products that aren’t selling well or increase sales of slow-moving products.  

This strategy can stimulate demand and generate a greater volume of sales.

Price Anchoring

Price anchoring involves establishing a price point that your customers can refer to when making purchase decisions. It plays on a buyer’s internal inclination to depend on a piece of initial information as a guide for all future decisions.  

By creating a tiered range of products that offer different features at different price points, you can stop consumers from comparing prices across a wide range of brands, which keeps price comparison within your range of products.  

When displaying your products, put your premium goods next to their cheaper alternative. For example, you can place a 2.0 L $150 air fryer next to a 2.5 L air fryer that cost $160 to encourage customers to consider the 2.5L because it’s better value for money.  

Are You Using the Best Pricing Strategy for Your Business?

Your pricing strategy plays a crucial role in both your bottom line and competitive edge.  

When deciding how to price your products and services, research your ideal customers and direct competitors. You also want to study past fluctuations of both price and demand for your offerings.  

You can use the data you gather to inform your pricing strategy decision and develop an optimal price point that enables you to maximize profit!

Digital Resource is a digital marketing agency in Miami that specializes in helping small businesses thrive online through effective SEO and digital marketing.  

We will help you come up with the best price for your products and services by conducting thorough market research and competitive analysis.  

Contact us today to start getting more customers and making more profits!

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