Should you have good pricing or great pricing? Our first instinct is to have great prices that will permit us to crush the competition, gain market share and fuel fast growth. The usual problem is that great prices typically provide slim profit margins. Good pricing, however, over the long term, should create enough profitability to make your enterprise a business rather than a glorified hobby. The challenge is developing a pricing strategy that is simple in concept and execution. How you create your best pricing will depend on your type of business, your sales objectives, competition, marketing strategy and/or cost structure.
Let’s look at several different types of businesses and their different approaches to pricing: Brick and mortar retail/wholesale enterprises which depend on inventory to sell, typically price the goods on arrival and the pricing can be manufacturer’s suggested retail (with or without discounts), or a standard markup of 50 to 100% depending on the item. Commonly competitive items, like a gallon of milk for example, should be shopped to be sure your price is close to that in stores like yours. It is important to feature the occasional “loss leader”, an item you sell at minimal markup, to stimulate traffic. The overall objective, however, is to have an inventory mix that will give you solid profit margins at the sharpest price points possible (considering your competitors pricing), especially on high-turnover items).
There are some factors, however, that can allow you to build generous margins with minimal competitive penalties. For example, my local convenience store has a 15 to 20% premium on much of what they sell compared to similar items in the local supermarket. The candy, soda, dairy products, and other grocery items are limited in variety and customers typically pay without complaint especially when the purchase must be made when the supermarket is closed or farther away. You can also charge more if your service is unique, for example you repair certain luxury cars, or you are in industrial air conditioning repair, or a doctor with a specialty practice, or a lawyer who deals only with tax litigation. Typically, the more specialized and unique the service the more you can usually charge.
So what should you be thinking about when you are considering your pricing strategy?
- Whatever you charge, make sure you cover your costs. A good price should do it; too many great prices might put you out of business.
- If competitive conditions are good for you, that is you have few competitors and solid demand, don’t be afraid to squeeze out a few additional profit dollars in your pricing. You can always lower them later if competition heats up.
- Focus on cost controls. Work diligently to drive your costs down because it will let you make more money without raising your prices.
Finally, don’t be emotional about creating your pricing program. Let your numbers, e.g. overhead, material costs, sales costs, and whatever else goes into you getting your product sold drive your pricing. It is the only way you are going to be successful. Good luck!
Do you have any good pricing advice?
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Melinda F. Emerson, known to many as SmallBizLady is America’s #1 small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure. As CEO of Quintessence Multimedia, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. Forbes Magazine named her #1 woman for entrepreneurs to follow on Twitter. She hosts #SmallBizChat Wednesdays on Twitter 8-9pm ET for emerging entrepreneurs. She also publishes a resource blog http://www.succeedasyourownboss.com Melinda is also bestselling author of Become Your Own Boss in 12 months; A Month-by-Month Guide to a Business That Works.
While you should absoluetly structure your pricing to cover your cost, final pricing should not be BASED on cost, but on what the market will bear.
For instance, Bob Burke, owner of Guy’s Bicycles in Bucks County, PA recently told me the story of how he went from 14 year old stock boy to owner of this prosperous local, independent business, and how the public’s passion for bicycling, combined with factors like consumer budget and big box store competition showed Bob the value of inventory.
“We don’t make much margin on bikes,” Bob explained, “but when somebody buys a bike, they’re usually going to buy a handful of accessories where we can make nice margins.”
Market demand for your older inventory may provide an unexpected windfall in the “long tail” marketplace. “When I bought the store from Guy, we had a storeroom full of “classic” bike parts which had largely stopped selling. This inventory of replacement parts and accessories was no longer in line with the newer style bikes we were selling, so we did an experiment and out a few things up on eBay. What happened next still makes me shake my head.”
Bob and his team set up an eBay store and listed all of their aged inventory at premium pricing.
“The cash influx from the sale of our old inventory put us ahead and we’ve never looked back.”
Bob didn’t base his pricing on a cost number that was, in some cases, 25 years old. He came up with a pricing structure based on market demand – and rode it all the way to the bank.
I like Don’s comments on Bob’s strategy to have minimal margin on the bikes but making nice profits on the accessories. It seems to be consistent with the article’s intent, that is Bob does not have great pricing on everything, just the products that get the customer in the door so he can do an up-sell. This is traditional retail at it’s best.
And as for marketing the classic (old ) inventory on eBay, this was a stroke of genius! In short order, your target market goes from local to a national alerting biking aficionados across the planet. He did a great job in turning lemons into lemonade!
pricing is part of product personality. Pricing is kind of self-declaration of product’s worth, my thoughts, you got to be inch perfect with pricing.
@mathurabhay