“Pricing strategy is not a small business thing!”
I have heard variations of this statement more times than I can remember. Pricing strategy is a discussion topic that many small businesses actively avoid – they prefer to focus on things like marketing campaigns (as if pricing wasn’t part of marketing…) or cost control (as if you didn’t factor your costs into pricing…)
And yet, small businesses can extract considerable value from a well-formed and well-executed pricing strategy. In fact, I would argue that Pricing – with a capital P – is an excellent source of sustainable competitive advantage for small businesses that learn how to leverage it properly.
S.M.A.R.T. Pricing helps small businesses do just that – leverage Pricing in a way that aligns with their strengths, weaknesses, objectives and market conditions, so that they can sell more at a higher average price point.
Here are 5 common Pricing issues that small businesses often face – and the S.M.A.R.T. way to solve them.
#1: The Never-Ending Race to the Bottom
The Problem: Everyone else seems to compete on price and on price only. When a new competitor enters the market, they try to undercut everyone to quickly build a customer base – but then, even after achieving their objective they do not raise their prices (see problem #5), and everyone else has to reduce prices to try and compete because customers are now trained to look for a bargain. Then a new competitor comes in and the cycle repeats… over and over again.
The S.M.A.R.T. Pricing Approach: Your prices should be competitive, but – with a handful of exceptions – you don’t have to compete on price, plain and simple. Refuse to accept that your only redeeming quality is that you’re cheaper – leave that to the others, let them fight for the bottom-of-the-barrel customers. Focus on finding the right price given your strengths, your weaknesses and your specific objectives.
#2: Cost-Plus Pricing as the Only Way to Price
The Problem: “Take your costs and add the margin you want on top of it” sounds easy – and in many ways it is – but it’s far from optimal. First of all, are you sure you have taken into account all relevant costs? Even a small miss can mean a big hole in your profits at the end of the year. Secondly, you are leaving money on the table – there are plenty of people willing to pay more, but you will never know if you focus exclusively on costs and margins.
The S.M.A.R.T. Pricing Approach: Shift away from a cost focus and embrace other . Value, for example – what is your product or service worth to your customers, in terms of time, money, enjoyment and so on? And what percentage of that value can you realistically capture? As I often say, 5k dollars or pounds by itself sounds like a high price – but if it results in your customer getting 30k worth of additional business, all of a sudden it’s a steal!
#3: The “One Price Fits All” Approach
The Problem: There are two variants of this – “Let’s apply the same price as everyone else in the market” (which typically leads to problem #1) and “Let’s charge the same price to all customers”. The latter is very common when you do Cost Plus pricing. In either case, you are clearly leaving money on the table by not differentiating yourself – and by not differentiating between different customer segments.
The S.M.A.R.T. Pricing Approach: Your business is unique, your product or service is unique, and your pricing strategy needs to be unique. This means breaking away from the crowd and doing things your competitors are not doing – such as figuring out the willingness to pay of specific customer segments and charging them different prices based on that. It sounds complicated, but it’s really not – it just takes some upfront work.
#4: Vibes-Driven Decision-Making
The Problem: Too many small businesses take important strategic decisions based on what I can only describe as “vibes”. Phrases like “this price feels right” or “I think that’s where the market is heading” are so common, and they shouldn’t be – they’re profitability killers. And business killers.
The S.M.A.R.T. Pricing Approach: You need data-driven decision-making, period. You need to know your data inside-out – your costs, your volumes, your margins, your competitor prices, your market research data… – and you need to review them regularly, so that you can take smarter business decisions. You also need a set of Key Performance Indicators (KPIs) that you will review at set intervals – these could be revenue, profit, units sold, average price, percentage of bids won and so on. Again, it sounds complicated, but it doesn’t have to be – for most small businesses, this can all be managed in an Excel spreadsheet or Google Sheet, without paying for expensive software.
#5: Fear of Raising Prices
The Problem: “If I raise my prices, all my clients will leave” – pretty much every small business owner has said this at least once. But that results in an overly cautious approach and a tendency to rely on “One Price Fits All” approaches (see problem #3), which in turn increases the likelihood of price wars (see problem #1)
The S.M.A.R.T. Pricing Approach: By not raising your prices, you are leaving money on the table. But you need to do it at the right time and in the right way. Data will guide you (see problem #4), the right process and tools will help you, but what you really need is a mindset shift. If you want an extraordinary business, you need to do extraordinary things – the kind of stuff your competitors will not do, because they don’t know any better.
Let Me Help You
Are you ready to apply the S.M.A.R.T. Pricing principles in your business? I am more than happy to help. The easiest way forward is to book a 30min free introduction Zoom call, where we can discuss your situation and devise an action plan.
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