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TIP: Under-Pricing May Sabotage Business Growth

Tip of the Month

April 2006

TIP: Under-Pricing May Sabotage Business Growth

Under-pricing is a common problem among small business owners, and giving customers a deal that is just too sweet may torpedo your firm - no matter how good you are at your chosen profession.

In an effort to attract business quickly, many entrepreneurs are tempted to low-ball their prices. Ironically, this strategy can hurt - rather than help - a fledgling business. Pricing your products or services appropriately is crucial to success. Here are some things to consider:
  1. Every business needs a pricing strategy, which will vary according to the nature of the business, and the mind-set of its customers.

  2. Think "value" first before setting a price. Many new enterprises pick cost-plus pricing, the most obvious pricing structure. Cost-plus pricing, in which a company adds a mark-up to the base costs involved in producing a product (or a service) to hit a certain profit margin, is a simple formula. Unfortunately, it doesn’t always reflect the true value of the product or service being offered. This is important if you offer specialized professional services, or a customized product with a certain cachet. In these instances, shape your pricing to match your customers’ idea of value. The beauty salon business is a good example. Some ladies want a no-frills low-price haircut, but many want the pampering, choices, and ambiance of a full-service beauty salon or spa. In this instance, pricing is not calculated on a cost-plus base, but is structured on what customers will pay - on what value they place on an upscale experience, or the name of a well-known stylist.

  3. It is wise to look at the competition, but don’t assume that your pricing should be identical. If you are a small firm competing with larger companies, you may be able to offer a price advantage that may be crucial if you are to capture a particular market segment. As a smaller enterprise, you may be able to offer more flexible (i.e. less expensive) "packages" to the price-conscious customer. Figuring out the ideal price points requires up-front research to determine how competitive you can be without becoming "too cheap" for certain customers.

  4. Consider differential pricing. Businesses like hotels and airlines discount, or provide special rates, to try to maximize occupancy (rooms or seats). This strategy is based on the sound reasoning that lowering prices is better than getting no revenue from empty rooms or plane seats. Or perhaps, you might offer different versions of your product or service - good, better, best - to address the value perceptions of the cost-conscious as well as those of affluent customers.

  5. Does your business rely on steady, repeat business? If so, you might be willing to offer an initial low-price inducement or rebate to start a customer relationship.
Pricing is as important to success as any other aspect of business strategy. Take the time to find the right pricing structure for your business. Leaving money on the table is not just bad for business - sometimes it can be fatal.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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