Thanks to our friends at Prospa
Pricing strategy is a perennial headache for most small business owners. Price your services too high and customers will go elsewhere; price them too low and you’ll struggle to turn a profit.
So where does a small business owner even begin when it comes to setting prices? How do you know when to review your prices? And when should you bump them up a notch? Here are the six questions to ask yourself when setting prices.
1. Do you know what your customers think?
Before you begin selling, you should first conduct market research to see if there’s an appetite for your service, and if so, what price potential customers would be willing to pay. “You can conduct your own customer survey in-person, and there are even customer research organisations that can help you, or you can simply put it out on social media and seek feedback,” says Catherine Plano, who’s an SME business coach focused on the factors that drive customers’ buying decisions.
2. What are your competitors doing?
Another way to conduct market research is to observe what your competitors are doing. Don’t just simply look to copy their advertised prices though, says Plano, focus on what they are doing well, where they could improve and what you could do differently to them. “Then tailor your own service and prices accordingly in your business plan,” Plano suggests.
3. Do you know what each service really costs you?
Make sure you factor into your pricing all your business’s expenses, such as rent, insurance, phone and internet, freight, and so on. After all, there’s no point smashing sales targets if you can’t turn a profit and keep your doors open. Small business coach Samantha Riley says it’s not just about deciding how much to sell something for – you also need to determine whether the service is even worth offering.
4. Have you done the math?
If introducing a new offering or changing the price of an existing one, it pays to work out how that will affect your cash flow. If you’ve got a good sense of your expected sales and know the direct cost to you of each unit, you can use Prospa’s sales forecasting template to get an instant sense of what your sales forecast will mean to the bottom line. You can also use it to play with different scenarios, such as selling fewer but higher-priced services.
5. Are you listening to your customers?
If your prices are too high, chances are your customers (or missed customers) will let you know. Rather than thinking they’re the problem, consider taking their feedback onboard. “Don’t take things personally – feedback is gold, even if it is negative. And remember the old adage: the customer is always right,” says Plano.
6. Are you watching the trends?
It’s also important to pay close attention to news and trends that directly affect your industry, says Plano, as changes can happen quickly – especially in service industries such as software as a service (SaaS). “Keep an eye on the market all the time because quick trend changes can affect market prices,” she says.
Setting the right prices is one tool to grow your business. Funding is another. Talk to one of Prospa‘s small business lending specialists on 1300 882 867 about how a small business loan can help you take advantage of opportunities as they present themselves, or how a line of credit can smooth out cash flow when you need it.