It’s a conundrum for just about every entrepreneur: How do you set the right price for a product or a service? If you charge too much, you could inhibit sales. If you charge too little, you run the risk of creating unsustainable margins.
Obviously, the best practices for setting and maintaining prices vary by business and industry. But there are several general mistakes that small businesses should avoid, says Kevin Mitchell, president of the Professional Pricing Society.
In a recent chat with the Intuit Small Business Blog, Mitchell shared three common pricing pitfalls — and a few words of wisdom about raising prices.
1. Waiting too long to figure out what you’re going to charge — “One very common mistake that small businesses make [is] to think about the pricing of their product or offering last, when it should be a consideration early on in the product [development] process,” Mitchell says. He harkens back to Marketing 101 and the original “four P’s” of marketing: price, product, promotion, and place. Price is the only P that involves money coming into the business; the rest involve money going out. Thus, pricing shouldn’t be an afterthought. “It works much better if you consider the pricing from the start and have everything else follow behind that, because the price is essentially the money that you’re going to get,” he says.
2. Assuming all customers are price-sensitive — It’s a mistake to assume 100 percent of your customer base is highly price-sensitive. Although some industries are more price-sensitive than others, “the number of people [who] are explicitly price-sensitive is probably a little bit lower than you think,” Mitchell says. This can be particularly true for new products and services, which leads to business owners leaving money on the table. “With newer goods and services, we tend to undervalue their worth,” he adds.
3. Thinking strictly in terms of product costs — The obvious goal for most businesses is to sell their products and services at a profit. But it’s not always wise to calculate prices with a simple “X + Y” formula, where X is the product cost and Y is the profit margin. Strategic pricing takes more variables into account. “We have to remember: Our costs don’t matter at all to our customers,” Mitchell notes. “The only thing that matters to our customers is our product and the value and worth that they get from that product. Ideally, prices should be set with that in mind instead of what our costs of getting or making the product are.” In other words, set prices based on what a product or service is worth to the market rather than what it costs to deliver.
A Few More Words of Wisdom
Pricing is rarely a one-time decision, especially in the online era. Again, it depends on the industry and a host of other factors, but Mitchell offers this general advice on changing prices: “The conventional wisdom is ‘bundle pain and separate pleasures,’” he says.
When it comes to raising prices, most customers will prefer a single, larger increase rather than a series of smaller spikes spread over time. “Rather than be nickeled-and-dimed — a little this month and a little more next month — we’ve actually seen studies that say people would prefer that you do it all at once,” Mitchell says.
Better yet, tie price hikes to reasonable justifications, such as new features or rising costs beyond the business’s control, whenever possible.