How to Price Your Small Business Products or Services - dummies

How to Price Your Small Business Products or Services

By Barbara Findlay Schenck

Pricing your small business products and services properly is one of the most important business decisions you’ll make, and it centers on the relationship between perceived value or quality and the price customers are willing to pay for it.

When sales are down or customers seem dissatisfied, small businesses turn too quickly to their pricing in their search for a quick-fix solution. Before reducing prices to increase sales or satisfaction levels, think first about how you can increase the value you deliver. Consider the following points:

  • Your customer must perceive your product’s value — or the worth of the solution your product delivers — to be greater than the asking price.

  • The less value customers equate with your product, the more emphasis they put on low price.

  • The lower the price, the lower the perceived value.

  • Customers like price reductions way better than price increases, so be sure when you reduce prices that you can live with the change, because upping prices later may not sit well.

  • Products that are desperately needed, rarely available, or one-of-a-kind are almost never price-sensitive.

Small business price sensitivity factors

Tell a person he needs angioplasty surgery, and he’ll pay whatever the surgeon charges — no questions asked. But tell him he’s out of dishwasher detergent, and he’ll comparison shop. Why? Because one product is more essential, harder to substitute, harder to evaluate, and needed far less often than the other. One is a matter of life and death, the other mundane.

This table can help you determine where your product fits on the price-sensitivity scale.

Price Sensitivity Factors
Price Matters Less if Products Are Price Matters More if Products Are
Hard to come by Readily available
Purchased rarely Purchased frequently
Essential Nonessential
Hard to substitute Easy to substitute
Hard to evaluate and compare Easy to evaluate and compare
Wanted or needed immediately Easy to put off purchasing until later
Emotionally sensitive Emotion-free
Capable of providing desirable and highly beneficial
Hard to link to a clear return-on-investment
One-of-a-kind A dime a dozen

Evaluate your small business pricing

Give your prices an annual checkup. Here are factors to consider and questions to ask:

  • Your price level: Compared to competitors’ offerings, how does your offering rank in terms of value and price? How easily can the customer find a substitute — or choose not to buy at all?

  • Your pricing structure: Do you include or charge extra for enhanced features or benefits? What promotions, discounts, rebates, or incentives do you offer? Do you offer quantity discounts? Does your pricing motivate desired customer behavior, for example by offering a discount on volume purchases, contract renewals, or other incentives that are factored into your pricing to reduce hesitation and inspire future purchases?

  • Pricing timetable: How often do you change your pricing? How often do your competitors change their pricing? Do you anticipate competitive actions or market shifts that will affect your pricing? Do you expect your costs to affect your prices in the near future? Do you need to consider any looming market changes or buyer taste changes?