Small Business Pricing Strategies

Sometimes, in business and in life, it pays to look at the bigger picture, and to see how the small parts connect and relate to the whole. In business, pricing is something that concerns and confuses a great deal of people. The simple question, 'how much should I charge for this?' is loaded with traps, opportunities, risks, and much more.

The best way to answer that question in one of the best ways possible, is to consider how the following are related:

1. Price: Your price must be enough to generate a profit while still being attractive to the customer.

2. Profit. Eventually, a business must become profitable or it will die.

3. Profit Margin. Your profit margin determines how much space you have to maneuver within the business, and what the return on investment is on the capital in your business.

4. Value Capture. This is the idea that your price is a percentage of the value that you provide to your customer. For example, if you are selling an accounting software package for $50 that replaces an accountant that would have cost the customer a fee of $300, then you have captured 17% of the value you have provided the customer ($50/$300 x 100). If you capture too much of the value you provide, your offer starts becoming unattractive because your customer also needs to feel they profited somehow from doing business with you. Value capture percentage influences your pricing and profit margins. If it makes sense, create as much value as possible so that you have more room for more value capture. Your value capture level can determine what profit margins you can set without making your offer undesirably expensive.

5. Sufficiency. This is the point at which a business is self-sufficient and brings in enough profits to motivate the owners and workers to keep it going. Figure out your point of sufficiency whereby your business can sustain itself and everyone involved is getting paid well enough to keep them satisfied and motivated.

6. Pricing Power. This is your ability to raise prices without losing customers. The less value capture percentage you have, the more room you have to raise prices without making your offer unattractive, and therefore the more pricing power you have. It is advisable to leave room in your value capture so that you have pricing power. Pricing power allows you to raise prices to overcome inflation, increased input costs, and so on. If your costs increase and you need to raise prices but you can't do so, your business is in trouble.

7. Price Sensitivity. High price sensitivity means customers are very sensitive to price increases and will not pay higher, whereas low sensitivity means customers don't mind paying more. It depends on your industry, competition, nature of value, environment, value capture percentage, and other factors.

In your business, do you know the nature and amounts of these ideas and how the relate to each other? Once you can place your business in that context, you will be a lot more in control.