Pricing your products right is a key to success for any SME owner. But coming up with the right pricing structure can be tricky business. Charging too much can turn customers away, while pricing too low can create demand that your business can’t possibly meet. How do you know when your prices are wrong? Here are five signs you need to make a change – and fast.
1. Competitors are charging more for inferior products
First-time entrepreneurs often feel they must undercut competitors to win business. That simply is not true. In fact, customers don’t just buy on price, they buy on value – the value that the product or service offers. If you offer a superior product, price it accordingly.
Only if you can produce a product more cheaply and maintain a decent profit should you consider a lower price.
Let’s take the example of Red Bull competitor, 5 Hour Energy, a 25ml shot-size drink, filled with vitamins and amino acids that retails for $2,99 in the US. It was competing against the well-branded energy drink Red Bull, which comes in at six times the size, but retails for an average of $2.
At a higher price than its competitors, with less drinkable volume and a relatively unimaginative brand name, 5 Hour Energy went from nothing to nearly $1 billion in retail sales in less than a decade. So much for using price to capture customers.
2. Your storefront is covered with ‘sale’ signs
Sales and promotions may boost foot traffic, but are these the customers you want? Companies perform better when they serve the customers who value them, and avoid the customers who don’t. Businesses aren’t charities. They don’t have to attract every person that indicates a fleeting interest in their offering.
Instead, look at the purchasing motivation and requirements of your target market, and set your prices based on how much the customers in that slice of the market are willing to pay. Customers buy because you provide something they value, not just because it’s cheap.
3. Your cash on hand takes a dive
Cash on hand – meaning all the cash a business has at the time books are closed at the end of the fiscal year – is one of the best barometers to determine whether prices need to be changed. When your cash on hand drops off from the previous year, it’s often because the difference between your costs and the price of your products is getting smaller – and so are your profits.
When your costs go up – whether it’s because your suppliers are charging more or overhead costs are increasing – your prices should, too. Most customers have become accustomed to cost-based price increases or surcharges in the past several years. These increases can be easy if the connection between cost and price is clear.
4. Your sales staff relies on price cuts to close deals
Are you becoming inundated with requests from your sales team to lower prices? This may mean your sales staff is not trained well enough to defend pricing and they’re relying on discounts as a crutch to close a deal. But it can also signal a need to review your prices, not necessarily lowering them, but at least to consider a different pricing structure.
Look at a ‘good, better, best’ strategy where a similar product is offered in three different options and price levels. You may need to frame the ‘better’ offering to appear more affordable, even if it means having products in there that you don’t really want to sell, but that makes the products you want to sell appear more reasonably priced.
5. Your business is attracting bargain hunters
Think of the saying, ‘You get what you pay for’. If a hair salon prices a haircut at R120 or R150, it will most likely attract people who don’t care about the quality of a haircut and who don’t want to pay for extra services like a wash or blow dry. Personal services are highly commoditised.
You price low and what happens is you’re going to attract the people willing to pay only the cheaper price. In turn, your profit margins are going to be razor thin, which means you won’t have the resources to innovate or market your products. Other customers will actually expect there to be something wrong with the business if services are too cheap… It’s the price itself that makes the value.