5 Common Small Business Pricing Pitfalls

Getting your pricing strategy right can have huge benefits for your small business. It sounds so simple: set your prices to the spot where your customers are willing to spend and you’re still covering your costs.

In reality though, pricing strategies can be complex. That’s why so many small businesses find themselves falling into the following 5 common pricing pitfalls.

Pitfall #1: Basing prices on costs instead of customers’ perceptions of value

The consequences of pricing your product too high are huge. Not only will the cost of sales go up, but sales cycles will be prolonged, affecting your profits. If you set your prices too low (because you’re focused simply on costs) you leave money on the table and reduce your profitability. The key here is to set your prices based on your customers’ perceptions of value. When your customers perceive your products to be a good value, sales go up and your profits thrive.

Pitfall #2: Holding the same price levels for too long

How often do you raise your prices? It’s a common mistake to leave your prices at the same level for as long as possible. Business owners fear that if they raise their prices there will be a customer uproar and some of them will leave. Savvy business owners know, however, that it’s important to habituate customers to frequent, small changes in price. This allows you to make changes to your pricing based on the fluctuations of supplier costs, demand, and other market changes while still maintaining a healthy profit margin.

Pitfall #3: Attempting to achieve identical profit margin across different product categories

Uniformity requires sacrifices, and when it comes to your business’s profits, there’s no need to make this sacrifice. Remember that different customers assign different values to the same products. For any one of your products, you can optimise profits when the price reflects customers’ willingness to pay.

Pitfall #4: Raising prices without forecasting competitors’ responses

There’s a tenuous balance that exists between competitors for the same customers. When you make pricing changes, you should predict the response from your competitors. Learn to anticipate the responses and be ready to control your reactions. If you can gather this information ahead of time, you can avoid the costly price wars that destroy industries’ profitability.

Pitfall #5: Failing to spend sufficient thought and time on optimising prices

Holding a hasty, last-minute “price meeting” to finalise a price on a new product or service is a recipe for disaster. In such a meeting, people are often unprepared, so decisions can be made based on the sales team’s anecdotes without any data to back up their claims. Avoid this kind of scenario by establishing internal procedures to optimise prices. A financial officer’s careful calculations of the product’s cost structure under many different assumptions can be invaluable. Make sure your financial officer creates such analyses on a regular basis and gives this information to all the decision makers to help them be prepared for discussion.

Pricing can be tricky, and an outside perspective can give you the added assurance you need to make a confident decision. Our business experts at Altus Financial would be happy to help you evaluate your current pricing and help you to see areas where your pricing could be improved. Feel free to contact us to set up a time to speak with a business expert.

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