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What is the best pricing strategy for a small business?

Part 1: The Fundamentals of Pricing


Setting the right prices is pivotal for the success of any small business. 


Pricing is probably the single most important factor in determining how much profit you’ll make or won’t make. If your pricing doesn’t allow you to create profit, you won’t have a business for long. 


Your pricing is also a strong indicator of how you value your time and how you believe your product is positioned in the market. 


If it’s too low, people may expect cheap, low quality service. Too high, and you might be out of consideration all together. 


Pricing tells you who the product is for and who it’s not for. 


  • Should you give a discount?

  • Should you offer package prices?

  • Should your prices be publicly available to view on your website?


There’s a lot to cover here - Let's start with the basics.


Understanding Small Business Pricing

Pricing is more than just a figure; it's a key component of your business strategy that communicates the value of your products or services. It impacts everything from your cash flow to your brand positioning. 


To start, you need to consider three main factors: 

  • The cost of your offerings

  • The competitive landscape

  • The perceived value to your customers 


(Info on dedicated workshops on these topics)




Cost Analysis: The Foundation of Pricing Strategy


The first step in setting your prices is understanding your costs. 


Put simply, you need to know that you’re selling your products or services for more than they cost you. It’s not just buy and sell prices you need to consider though. 


Other considerations around true costs may sometimes include:

  • Materials 

  • Labour

  • Overheads

  • Marketing

  • Shipping & logistics

  • Research & development


Empty delivery docks in a warehouse
Big empty spaces lead to big empty wallets

Once you have a baseline for your costs, you can start to look at the profit margin (the percentage of the selling price that is profit after costs are accounted for).


As a general rule of thumb, if your profit margin (Gross Profit) as a % of sales is higher than your expenses as a % of sales, you’re profitable and making money. 

Optimising your business for profit is probably the most impactful thing you can do.


If a business has adequate sales and no major red flags, it's always the first thing we work on in 1:1 coaching programs. When you're optimised for profit, every sale you get it more valuable.


Once you know your pricing is profitable, you have to work out how to sell it in your market - which means market research.


Cost Type

Description

Impact on Pricing

Considerations for Pricing Strategy

Materials

Raw materials, components, etc.

Directly affects product cost

Consider bulk purchasing for discounts; assess quality vs. cost

Labour

People power for production / service

Influences production capacity and cost

Evaluate efficiency; consider automation or outsourcing for repetitive tasks

Overhead

Indirect costs (rent, utilities, etc.)

Affects overall business expenses

Optimize operations to reduce overhead; consider remote work options


Market Research: Knowing Your Customer and Competition


Your pricing needs to reflect your customers' expectations and your position relative to the competition. That is, if you’re more premium than the competition, your pricing should reflect it. 


How you are priced compared to your competition tells potential customers what to expect from your business and your competitors - “There must be a reason this Porsche costs so much more than this Toyota”


When you conduct your market research, aim to understand your target audience's demographics, psychographics, personal preferences, and purchasing behaviour.


Basically, what value do you need to create to make them feel good about parting with their hard-earned cash? What are the must haves and the dealbreakers? What do they perceive as valuable and what is just fluff?



Test tube with a plant in it, steam rising
Not all tests happen in the lab


Tip: When looking at competitors, before directly comparing prices, try and work out if their target market is identical to yours? Ask yourself, who is this business targeting and do they care about the same things as my target market?


While it’s important to know what your competitors' prices and pricing strategies are, most small business owners spend too much time looking over their shoulders at what competitors are doing. I’d rather see you invest in creating value for your target market, and building a unique and valuable offering. This is far more valuable than focusing on what your competitors are doing and how they are pricing.


Besides that, many small businesses are actually competing with inaction / not buying more than they are with their supposed competitors. 

For example, if you sell a CRM system, it’s entirely possible that your customer is tossing up the choice between buying your software and doing nothing (keep using excel like they are now). 


They need to perceive the value you offer as being excess to the price they pay.



How Customers Decide to Buy - Perceived Value

Pricing sets your customer's expectations. From the minute they hear a price, they begin to weave rich narratives about the quality, speed and experience your product or service delivers. 


Brand Image and Pricing

Brand Positioning

Pricing Strategy

Expected Customer Perception

Marketing Approach

Premium

Higher than average prices

High-quality, luxury

Emphasise detail,  quality, exclusivity, and prestige in marketing

Economy

Lower than average prices

Affordable, value for money

Highlight affordability, practicality, and value in promotions


And perceived value isn't just about the physical attributes or functionalities; it encompasses the emotional appeal, brand reputation, and the solution it provides to a customer's problem or need. 


When customers perceive high value, they are often willing to pay more, which can positively impact your profit margins and enhance brand loyalty. 


Therefore, understanding and effectively communicating this value – through quality, branding, and customer experience – is essential. It’s not just about what your product is, but the story it tells and the needs it fulfils. 


It’s about how it makes them feel deep down inside.


We're talking BIG feels like:


If you can tap into these feelings, you’ll create true value.


Here’s the simplest way to think about it - Who wouldn’t buy a $10 note for $5? 

People exchanging money
This is a good deal for someone

It's not always about money though - consider the true currency (Big feeling list above).


If you can create more value in the mind of your customer than you charge, and you’ll never have to work to sell a product in your life. 


But how do you set your prices at that level? Learn about different models of price setting in Part 2 - "Comparing the most common pricing strategies in small business"



 

Hi, Jake here! I wrote this, thanks for reading, I hope you got what you needed out of it.


As always, I'm keen to help, so if you have questions I'm only ever an email away (jake@upperlimit.com.au)


Or book a time to find out if and how I could help your small business thrive.


Onward and Upward, Jake



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