As a small business owner, pricing your products and services can be tricky.
You want to make sure you are charging enough to cover your costs and make a profit, but you also don't want to price yourself out of the market.
In this blog post, we’ll discuss four questions you should ask yourself when setting prices for your products or services. By answering these questions, you will be able to find the right price point for your business and maximise your profit margins. Let’s dive in.
#1 - What is Your Market Position?
Before you can set a price, you need to understand your market position. What are your competitors charging for similar products or services? How much do your customers value what you offer? Are you the only provider of this product or service in the area?
It is important to be aware of what other businesses are charging and how much your customers are willing to pay. If your product or service has a true USP that no-one else is offering, then you can charge more than your competitors. However, if there are many other businesses in your market offering an almost identical product, service or experience then your need to compete on price will be greater.
Market positioning is also about the experience you offer your customers. Are you a luxury brand or do you offer budget-friendly products and services? What is the perception of your business?
You also need to consider what your target market is. If your products and services are aimed at high-income earners, you can charge more than if they are aimed at low-income earners.
#2 - How Much Repeat Business Do You Want?
Repeat customers are essential for lots of small businesses. The more repeat business you have, the more profit you will make.
However, certain business types aren't as reliant on repeat custom. For example, taxi services or fast food restaurants in popular tourist areas don’t need as much repeat custom.
Generally speaking, however, a high customer retention rate makes for a more profitable business since it’s far cheaper to retain existing customers than to attract new ones.
Therefore, if you want to increase your profit margins, you need to set a price that will encourage customers to buy more than once. This may mean earning less profit during a single transaction, but attracting a steady stream of repeat business. If your products or services are too expensive, customers may find a cheaper alternative elsewhere.
#3 - Are You Prepared To Go "Freemium"?
Freemium is a business model where you offer a basic product or service for free and then charge for premium features or services.
This can be an effective and low-cost way of attracting new customers, as they can try out your products or services without spending any money.
However, there is a risk that some customers will never upgrade to the premium features or services.
If you are prepared to offer a free product or service, you need to make sure your costs are low enough so that you still make a profit.
You also need to be sure that the premium features or services are worth the extra money to ensure that customers are willing to purchase them.
#4 - Do You Want to Include Versions for Different Price Points?
Many companies offer different ranges of products to appeal to different price points.
With Apple's iPhone, for example, you can currently purchase the more affordable mini version, the standard iPhone or the iPhone pro.
Similarly, airlines offer economy class, business class and first class.
With regards to your business, this could mean offering a basic, standard and premium version of your product or service.
The key is to make sure that the difference in price reflects the difference in value.
For example, a more expensive product should offer more features or be of a higher quality than the basic product, and your marketing should reflect this, too.
Final Thoughts
When pricing your products or services, it is important to consider all of the factors discussed above. By asking yourself these four key questions, you’ll be able to set a price that is right for your business and encourages customers to keep on coming back.