How much will you charge?

One of your key tasks as a business owner is to set the right price for your goods and services. Set them too low and you might not make a profit, or even cover your costs (the cause of many business failures). But if you set them too high, you might drive customers away. If you don’t have a proper pricing strategy and rely on what everyone else charges, you’re assuming what they charge is correct.

To achieve a sensible pricing strategy, you need to do two things.

Understand what the competition is charging and what your customers would be willing to pay. Remember, your competition isn’t just similar businesses in your area. These days it includes online and e-commerce businesses too – both in New Zealand and internationally.

You also need to know what your business objective is, as this will directly influence your pricing. For example if your objective is to:

• Maximise your profits, you may charge as much as you can to generate as much profit as you can. Prices that are significantly higher than the competition mean that you could risk having customers go somewhere else, but that could be ok if you still get enough customers to make a profit (and you are doing less work).
• Increase or hold your market share, you might have to sacrifice some of your profits, and possibly charge less to certain customers.
• Match or beat the competition’s prices, you may price as low as possible. Pricing low can work, especially if you are aiming to grab new customers. But if you decide to compete head on with price, consider why. Is it just that you’re lacking confidence? If your competition includes larger businesses with deeper pockets, they’re always going to win the price war. You also don’t want customers perceiving your goods or services as lower quality than the competition. If you raise your price, up goes your profit margin.

Armed with this information, you’re in a much better position to establish the best price for your business.

You should always be seeking to increase your prices over time, if only so that you can keep up with inflation. Increasing prices widens your margins and frees up cash you might need for business growth.

But what you don’t want to do is alienate your customers by increasing them too dramatically, so keep the following in mind when you’re considering a price hike.

Try to find ways to reduce your costs before you increase your prices. Reducing your energy use or changing providers, cutting down on travel expenses, removing poorly-performing products from your inventory are all ways to do this.

It’s important to convince your customers that your products or services are worth the increase. Use your unique value proposition – whether it’s great customer service, free delivery, or a superior product – to help show customers why your product is worth the extra money.

Confirm there’s enough demand for your product or service to justify a price hike. Schedule regular price reviews, and amend prices based on market expectations. Remain flexible with your pricing so you can update it on the fly if you have to.

Consider your market position and what your competitors are charging. Think beyond competitive pricing and focus on your unique selling points, and how your pricing might complement these. Remember too, that your competitors aren’t just those businesses that are physically close to yours – the internet and e-commerce has shrunk the world considerably.

Make sure your staff are on the ball – perhaps even give them a quick refresher – and remember to provide them with everything they need to do their job properly. Make an effort to know your best customers and deal with complaints quickly and efficiently.

As well as giving great customer service, it may also sometimes be relevant to communicate to your customers the reasons why you’re increasing your price – especially if the price hike is significant. Open communication shows that you’re thinking about your customers and their expectations, and means your customers are more likely to understand and accept the change.

Consider staggering the price increases of your different products over time, instead of raising them all at once.