Pricing Right

Real Small Business: Sales & Marketing

Pricing Right

From the Editors of Real Small Business

The last time you were on an airplane, you were likely sitting near someone who paid twice as much as you did for a ticket. You were probably just as close to someone who paid only half your fare. Airlines have complicated algorithms for pricing their seat: business travelers are willing to pay more on short notice, while leisure travelers plan ahead and deal with travel restrictions to pay much less.

Small business owners don't have the luxury of complicated pricing algorithms to determine how much to charge for their goods and services. Accounting for such factors as competition, costs and customers can prove tricky when running a small business.

While pricing below the competition might seem like a great way to drive sales, it may actually create the opposite effect. When you cut prices, it decreases your profit margin. Invariably, your competition will slash their price to catch up, effectively trapping you with your lower margins. This can be especially difficult if you are up against a larger chain store or businesses that are more diversified than yours. Instead, consider offering (and marketing) low-cost ancillary benefits that might allow you to price above the competition: better service, exclusive branding, or a personal touch.

Of course, costs need to be accounted for when setting prices. Be sure not to exclude overhead, labor, and the cost of goods in your calculations. You wouldn't want to lose money for selling an item.

In some businesses, other pricing techniques can lead to maximized profits. Think about how the following examples might apply to your business:

Volume discounts. At a stationery store, one pen might sell for $2.00, while a box of ten could sell for $18. While the per-unit profit margin is reduced by 10% in the box set, the net profit can jump by much more than that due to volume.

Price floors. If you want your restaurant to attract the type of customers that spend $25 on an entrée, you might not want to price the least expensive meal below $20. Of course, you'd better hire a great chef if you hope to sustain those prices.

Two-part pricing structure. In this structure there is an initial fixed charge, and a variable charge going forward. For example, look at ink-jet printers - the machines themselves can cost less than $150, but the ink refills cost $50, and you need to keep buying them forever.

Peak load pricing. As demand for your product rises, you could consider charging more (e.g., if you're leasing out a beach house on Cape Cod, you can certainly charge a lot more for a summer monthly rental than a winter one.)

Meet Norman Weiss, M.D., a psychiatrist in private practice, who discusses how he takes a sensitive approach to pricing his services. Click on your preferred video format in the 'Watch the Video' area on the right.
Access articles on top six pricing mistakes, tactics to avoid lowering your prices, bidding basics, and effective competitive analysis.
Find out E. James Burton's answer to the question, "I am planning to start a computer consulting business. How do I determine a price for my services?"
Read a profile of Sho Dozono, President of Pacific Gateway, a Portland, OR-based air consolidator.

We talk about Pricing Right with Norman Weiss, M.D. of a private psychiatric practice.

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Pricing Right
The last time you were on an airplane, you were likely sitting near someone who paid twice as much as you did for a ticket. You were probably just as close to someone who paid only half your fare. Airlines have complicated algorithms for pricing their seat: business travelers are willing to pay more on short notice, while leisure travelers plan ahead and deal with travel restrictions to pay much less.

Your Company's Credit
More than one aspiring filmmaker tells the story of completing a first film project with a little gumption and a maxed-out credit card. Believe it or not, starting a business isn't much different. Small business owners rely on credit, both for getting their businesses off the ground and for keeping them afloat -- though most entrepreneurs will tap more resources than a single piece of plastic.

Taking Time Off
Sometimes the hardest part of running a small business is knowing when it's okay to take a break. After building the business from the ground up, it's hard to separate where work stops and the rest of your life begins. Nevertheless, it's safe to say that taking some time away from work will make you more productive in the long run.

Wholesale/B2B
When you set up your first lemonade stand as a kid, you probably didn't think about how much your supplies cost - the 50 cents a glass you made per glass was pretty much pure profit. But in a wholesale or business-to-business operation, Mom and Dad aren't giving you the ingredients for free. Your relationships with suppliers can have serious impact on your bottom line, your cash flow, and your sanity. Bearing in mind some basic considerations can help to create a satisfying collaboration.

Preparing for Tax Season
While your thoughts at the end of the year are probably filled with everything from next year's budgets to holiday vacation plans, don't forget that tax season will be upon us before you know it. Leaving everything for a last-minute cram session could disrupt your business in the spring. To avoid a crunch, you should get prepared for tax deadlines well in advance.

Structuring The Business
Determining how to structure your business is a potentially complicated decision. Your options include sole proprietorship, partnership, corporation, and limited liability company, and each carries with it potential benefits and disadvantages with regard to the legal and financial obligatons of your business. Ultimately, the choice will be based on your individual goals and style of doing business.