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.