You can sell anything for nothing. As an entrepreneur, your
challenge is to figure out what you need to charge – and what the
market will bear – in setting the price of your products and services.
Price
too high, and you can stall your business right out of the gate. Price
too low, and you may begin with unexpected sales volume – but it can
hurt you in the longer term. Throw in the varying influences of
different types of sales outlets while you parry the pricing strategies
and schemes of competitors, and pricing can become as complex as it is
important.
So step back a bit, and consider these ideas for working through your pricing strategy and decisions.
Make pricing a major consideration of your business model
Pricing
is an important component of cash flow and profitability, as well as
marketing and even branding – so give it considerable thought. In
general, you want to price your products and services high enough that
you don’t leave money on the table, but low enough that you’re not
losing potential customers. For startups selling premium goods, premium
pricing must prevail. If you’re selling what’s considered a commodity,
you’ll have to figure out how to make your business model work on
minimal prices.
Billy Lowe, for example, is a hair
stylist for TV stars such as Ellen DeGeneres and Debra Messing as well
as the moneyed elite of Beverly Hills, Calif., and he’s unapologetic
for his premium pricing. “Clients are glad to pay your prices when
there is perceived value and excellence,” he says. “The spirit in which
you offer your products and services also can help determine their
attitudes toward your premium prices.”
On the other
hand, Randy Russo has been known to blow away potential customers with
his bids for residential roofing jobs in metro Detroit, which often
come in at only a half to two-thirds of what competitors charge. He’s
able to make those prices work because he does much of the labor
himself, and his tiny company doesn’t have the extra supervisory layers
of the competition. “And the pricing helps me get volume and steady
work for me and my crew,” says the owner of Shelby, Mich.-based Russo
Brothers. “It’s worth it to me to know that, at those prices, the work
is always going to be there. And it encourages us to work efficiently.”
Psych out the customer
Use
informal focus groups, testing and even your own experiences as a
consumer to figure out what might go through the minds of customers as
they consider your prices. There’s a sound psychological reason, for
instance, why so many prices end in “.99” rather than “.00” – as in
$19.99 instead of $20.00.
Once Julie Sloan Lowenbaum
came up with her new clothing accessory, Cuff Luv ? a pair of
decorative “dickeys” for garments with plain long-sleeves ? she had
to price it. She came up with $38.50 a pair, largely because she
believed that customers would see both the quality and the value of her
product. Because Cuff Luv mainly is sold in boutiques where customers
can look at and handle the product, Lowenbaum believed they’d assign
high value to it. Yet she wanted to keep the price under $40, making
Cuff Luv “giftable,” as she puts it.
Don’t be afraid to
test pricing and adjust it if necessary. If you have a store and can
play with pricing, that’s easy. But even manufacturers can do this.
Ginger Scoville began pricing the bottled salsa, jams and other
products made at her G&M Farms, in Morrisville, N.Y., for $6 to
$7.50 a bottle. But now that consumers have responded positively and
Scoville has had a chance to zero in better on her costs, she plans to
nudge all the prices closer to $7.50.
Consider keystone markups for pricing strategy
One
easy guide for retail pricing is the “keystone markup” – doubling your
costs for an item to arrive at its price. This is a common tactic in
retailing because it simplifies pricing decisions and, over time in
that industry, has proven itself as a formula that typically covers
costs and provides a reasonable profit margin.
But
keystone pricing should only be used as a guideline or a tool for
setting your prices – not gospel. “It doesn’t take into account
competitive retailer prices for the same item,” says Jay Lipe, head of
Emerge Marketing, a Minneapolis-based consulting firm, and author of
the new book, Stand Out from the Crowd: Secrets to Crafting a Winning Company Identity ($24.95, Kaplan Business, 2006) . “This is an easy way to arrive at a price, but one that leaves room for error and maybe lost profit.”
Formulate an MSRP
A
common tactic suppliers use in trying to establish and protect pricing
levels is the Manufacturer’s Suggested Retail Price (MSRP). As a
supplier, you can’t dictate how a retailer prices your product. But you
can tell them through an “MSRP” what price you believe the market will
bear.
“This is a way for manufacturers to try to control
their retail pricing to support their brand equity and protect their
distribution channels, like the small retailers who may still be
selling your product even after you’ve landed that contract with
Wal-Mart,” says Lanny Goodman, CEO of Management Technologies, an
Albuquerque-based strategic-planning consultant.
Discount – but only with a twist
Simple
discounting usually is about the worst pricing move you can make. For
one thing, consistent pricing tells both your wholesale and retail
customers that you stand behind the value of your product, and displays
a tacit confidence that, in turn, elicits their respect and agreement.
Discounting just confuses customers, leading them to expect a pricing
gimmick every time rather than paying full value.
Small-business
author Larry Merserau suggests that instead of lowering prices, throw
in extra value, such as offering free lessons if you’re a music
retailer selling a new guitar. Or package a number of items together
for a reduced price overall. Perhaps offer a discount only on volume
purchases.
RingCentral.com has monthly pricing plans for
its telephone-service packages that range from $14.99 to $99.99. But
monthly prices are $9.99 to $79.99 if customers choose to pay annually.
More than 20 percent of customers sign up for a monthly plan and then
switch to annual, says Boris Elpiner, vice president of marketing for
the San Mateo, Calif.-based startup.
“It creates a win-win
situation,” he says. “It helps us with cash flow and customer
retention, and it’s a win for customers because it saves them money.”
Our Bottom Line
Many startups give short
shrift to setting a pricing strategy for their products. By not
optimizing this important strategic tool, they could be leaving sales
and profits – or both – on the table. Shrewd entrepreneurs use several
effective tactics to make pricing a crucial lever for growing their
business.
