Pricing your products or services in a way that encourages sales is so important to each and every business. You spend so much on advertising and promoting your products or services to bring customers in the door, and pricing is the way you close the sale once they arrive. After all, you can have great advertising and great products or services, but if your pricing is wrong, you just will not make the sales you need.
Is there an optimal pricing strategy? No. Pricing is one of those things that you have to fine tune as you go. Normally, the narrower your gross margin, the less able you will be to reduce your prices, meaning you will need to compete on everything else without giving on price. However, if the gross margin on an item is 50 percent, you might be more amenable to reducing prices as you have this padding built in.
It is easy to increase sales if you keep prices very low, but doing so will destroy your profits and cause your business to fail. On the other hand, prices set too high will destroy profits as well since no one will choose to spend more on the same product. The key to a strong pricing strategy is finding a price that is neither too high nor too low, but fair from the customer’s viewpoint.
Does this mean you should not give on price? My thought is if a great customer comes to you with a price from a competitor, you might have to reduce your prices to preserve the relationship. However, this should be the exception rather than the rule.
One method of retaining your margins through pricing is to make sure that your prices can not be compared to your competitors. For example, financial institutions frequently make it so consumers can not compare CD rates by selecting unique days the CD matures (e.g. 11 months and five days).
Lately, I have noticed a trend among drug stores and clothing retailers. They keep the same merchandise in stock but re-price many of their products every week, making it so hard for the consumer to remember the actual price of the item.
One large clothing store does this so effectively that every time you walk in, you feel as if it is brand new inventory. In reality, though, it has just been re-priced so that it feels new.
The problem with competing on price is that you attract only those customers that are interested in the lowest cost without regard for all of the other services you bring to the table. If they are shopping just for the best price, they will not be loyal to you, and in a heartbeat, they will flip to the next vendor who offers a cheaper price.
For most small businesses, pricing should be the last component you compete on. Rather than price, you should try to compete on service, ambience or quality. The more you can convince the customer that your products or services are unique, the less you have to compete on price.
Now go out and look at your pricing strategy for each of your products or services to ensure that you are charging and receiving a fair price.
Jerome S. Osteryoung, director of outreach services at the Jim Moran Institute in the College of Business at Florida State University, can be reached at 850-294-7477.