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Guide to Setting Prices

By Jennifer Lobb –

Price TagPricing can and often does make or break your business, and hastily setting prices without addressing important concerns can result in a whole host of problems, including plummeting margins, decreasing market share, or brand alienation.

Every business is different, and in many cases, the pricing strategy you choose is entirely reliant on the industry in which your business exists. However, though differences are plenty, there are some steps that, when incorporated into pricing efforts, will help you set prices that will support your financial goals while growing your business.

Identify your goals

I’m going to go out on a limb here and say that your goal is likely to sell things and make money. But a good pricing strategy is one that recognizes the finer nuances required to reach the ultimate goal. Are you simply trying to keep up with competition and meet last year’s benchmarks, or are you trying to increase market share? Do you want to maintain the status quo or do you need to make up enough revenue to cover a rough patch? Additionally, it’s helpful if you put a numerical value on your goals by determining your revenue target and factoring that in to your decisions.

Determine Your Costs

Utilities, rent, agency or OPM fees, etc. are all costs that will factor into your bottom line and therefore should be factored into any pricing decisions you make. But there are also seasonal costs that you need to factor in as well. For example, are you getting any time-specific deals from vendors this year? What type of stocking or shipping fees will you be on the hook for during the busy holiday season?

Monitor your competition

Smart business owners are aware of their competition and what pricing and promotional strategies they’re applying to products and services. That may mean signing up for promotional emails, engaging in secret shopper activities, visiting the site, or stopping in to see what’s going on. Being aware of your competition can help you evaluate your own prices in the larger market and it can also lead you to identify opportunities for growth.

One word of caution – be careful when defining and classifying competition. If you run a boutique shop with women’s clothing, you likely won’t compete with the deep discounts and units sold by department store competition. When pricing your products, it’s good to be attuned to those “big box” or larger company prices, but framing your strategy around those prices can lead to a financial nightmare. Instead, you may want to turn to direct competition, like small businesses that sell similar products.

Be realistic when it comes to limitations

Pricing decisions cannot be made in a vacuum. They should be made with an awareness of the limitations and challenges your business may face. If your business is seasonal, for example, and you rely on a few weeks’ or months’ worth of revenue to carry you for the year, then you need to consider that as you determine prices and balance between competitiveness and financial needs. Setting prices too low may give you leverage over the competition, but you will likely limit revenue capabilities, which will inevitably lead to financial problems in the months to come. If you set prices too high, you may not be able to gain a foothold among your competitors, which will also leave you struggling for the remainder of the year.

Though the example above is one of extreme seasonality, the same concerns will likely remain true for year-round businesses. The holidays can be pricey – business owners must often amp of staffing, marketing efforts, and inventory purchases – and even if you go on to sell every product on the shelf, if you set prices so low that they go below the margin of operation, then trouble will quickly follow and your holiday efforts will all be for naught.

Review past performance metrics

Once you determine your goals and limitations, take a deep dive into financial and inventory reports of the past. At a shallow level, this can help you identify pricing strategies that did or did not work in the past. However, this exercise also can unlock deeper information. For example, by identifying the products that bolstered performance or sold without discounts you may be able to identify some places where you can maintain strong margins while identifying others that can benefit from a drop in price. One of the keys to successful pricing is balancing aggressive pricing with margin healthy pricing, and that information only becomes clear when you take a look at past performance.

Consider your discounts & promotions strategy

Most businesses offer some type of promotional or discount pricing, and the prices you set will play a significant role in how you utilize those sales tactics over the course of the year. If you price your products too low, you run the risk of eliminating sales pricing and valuable promotional tactics. Sometimes a conversion hinges solely on messaging at the time of sale. A consumer that sees a product discounted for 25% or 30% may think they are grabbing a real bargain. The same isn’t necessarily true of a 5% discount, even if the end price is the same. That’s not to suggest you need to increase pricing just to make a bigger “splash,” but your pricing and your promotional efforts should go hand-in-hand.

A successful pricing strategy is revenue rich and margin healthy. One way to accomplish that is by methodically and purposefully setting prices. Though there are a host of pricing strategies, success hinges on careful analysis of both internal metrics, like past sales and existing or anticipated costs, and external metrics, like competition and customer expectations. Your pricing strategy is only as strong as the effort that goes into it, and for most, putting the legwork in now will lead to a better bottom line at the close of the quarter.


About the Author: Jennifer is a alum of the University of Denver. While in the graduate program there, she enjoyed spending time identifying ways in which non-profits and small businesses could develop into strong and profitable organizations while promoting strong community growth. She also enjoys finding unique ways for freelancers and start-up businesses to reach and expand their goals.

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