Pricing strategy for your small business will set the standard for your product or service in the marketplace, and is an important dimension to both your bottom line and your competitive edge. Early in the life of your small business, research your intended market as deeply as possible, and pay close attention to past fluctuations in competition and demand. Show
Key Takeaways
Don't Compete on Price AloneWhen developing a business plan, owners often make the mistake of setting their pricing strategy to match the lowest-price provider in the market. This approach comes from a cursory understanding of direct competitors, and the assumption that the only way to win business is by having the lowest price. However, having the lowest price is not a strong pricing strategy for small business, as it invites customers to see your product or service as a commodity, and obscures the value of your offering. If you're operating within a niche market, larger competitors with the ability to lower operating costs may eventually enter your segment, and can destroy any small business attempting to compete on price alone—including yours. Avoid the low price strategy through research on the market you intend to enter, and by repeatedly analyzing the following variables: Ceiling PriceThe ceiling price is the highest price the market will bear, which can be explored by surveying both experts and consumers, and by asking questions regarding pricing limits. Keep in mind that the highest price available on the market may not necessarily be the ceiling price. Competitive AnalysisDon't exclusively look at your competitor's pricing; look at the whole value of what they're offering. Are they serving price-conscious consumers or an affluent niche? What are the value-added services, if any? How do you compare? Price ElasticityPrice elasticity tells you about the responsiveness, or elasticity, of the demand of a product or service when nothing changes but the price. Jill Avery, a senior lecturer at Harvard Business School told the Harvard Business Review that "marketers need to understand how elastic, sensitive to fluctuations in price, or inelastic, largely ambivalent about price changes, their products are when contemplating how to set or change a price. Some products have a much more immediate and dramatic response to price changes, usually because they’re considered nice-to-have or non-essential, or because there are many substitutes available." Choosing a Price Strategy for Your BusinessOnce you understand consumer demand within your market, review your own costs, supply chain, and profit goals as a way to inform your choice on pricing strategy. Below are a few pricing models to consider:
Avoiding a Price WarA price war is when competitors continually lower their prices to undercut one another and gain market share. This almost never works out in a small business's favor, especially when competing against globalized pricing. According to Wharton School marketing professor, Z. John Zhang, the outbreak of a price war is considered a legitimate and effective business strategy in China. “In a growing market, there are all different companies competing—some good, some bad—and the industry finds a way to consolidate. The only way to do that is a price war, where you bring down the prices and squeeze out the inefficient [companies].” But in the U.S. Zhang said, the markets are more mature and they offer, “oligopolistic competition among mostly equals and [therefore] encourages more finesse in devising marketing strategies.” NoteOligopoly markets are markets in which a few suppliers dominate, which can reduce competition. Below are tips to avoid a price war with your competitors:
The Bottom LineIf you create sound market research habits early in your journey as a small business owner, you will have greater foresight when setting prices for your products or services, and an ability to adjust when necessary. Research will help you avoid taking a problematically low price-position in the market, and will provide valuable insights into how your future customers will spend money. Frequently Asked Questions (FAQs)What is the simplest pricing strategy?Cost-plus pricing may be the simplest strategy for small business. With this approach, you determine the breakeven point for your product, and then add a percentage-based premium or markup to arrive at the final price. Why is pricing important for small business?Pricing is the simplest and the fastest way for any business, including small business, to increase profits. According to McKinsey & Company, a 1% increase in price leads to an 8.1% increase in operating profit for firms listed in the S&P 1500. Meanwhile, a 1% decrease in price leads to a corresponding decrease in operating profit of 8.1%. Getting pricing right can have a significant effect on the success of a small business. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! How can a small business compete with a large business?Here are those 12 ideas for small businesses to compete with big brands:. Establish a Solid Digital Presence for Your Small Business.. Test Out Marketing Trends.. Build Your Business's Reputation.. Deliver Excellent Customer Service.. Make Improvements Based on Customer Feedback.. Segment & Refine Your Target Audience.. What is the biggest advantage big business has over small business in the global marketplace?The advantage that large firms have is that typically, they are more established and have greater access to funding. They also enjoy more repeat business, which generates higher sales and larger profits than smaller scale companies.
How can a small local business compete against a global corporation?Small firms can successfully compete with global competitors by carving out a niche and making the most of their strengths. By staying connected to customers, being nimble and building strategic partnerships, they can even up the playing field and continue to dominate their local market.
How can a small business survive in a competitive market?Make sure you research demographics and understand the behavior and habits of your target audience. Establish your presence on social media – this sounds obvious these days, but many small businesses do not perform well on social media. Your company can be different. You can lead in this space, even on a budget.
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