How to Set Better Prices

The strategy that you use to set prices for your small business will create the standard for your product or service in the market. It is a critical dimension to your bottom line and your competitive edge. At the launch of your business, you should research your intended audience as much as you can and pay attention to the past fluctuations in demand and competition.

Many business owners make a mistake of setting their pricing strategy to match their lowest-priced competitor when they create their business plan. This approach assumes that the only way to succeed is to have the lowest price and comes from only a basic understanding of competition.

Here are our top 5 tips on how to set better prices:

1. Controlling The Pricing Cycle

What we see a lot of businesses doing is letting their prices be dictated by external factors, like what their competitors are doing, or reacting to the seasonal activities.

These elements will influence your business, but it is important to take a longer-term, proactive viewpoint on how you will set your prices for your products and services over time.

You should start by defining your price based upon factors like your input costs, the strength of your value proposition and customer price sensitivity. How will you position and maintain your price over time as your customers’ needs, your product and the market evolve. You should also think about how to communicate the value you offer to your customers constantly.

2. Use Subscription Models

This is a model that has been proven to be successful time and again. From video streaming to online accounting to gym memberships, consumers have shown that this is a way that they are willing to pay for their services.

“Is there any element of your business that you could take into a subscription model?” asks Sue Hope, a business writer at Draftbeyond. “Ideally, in a way where your customers can use more of your services without adding to your costs.”

This model helps you to create a stream of predictable income, while giving customers the predictability and value for money that they are looking for.

3. Build A Strong Pricing Structure

Take some time to consider the products and services your offer and how they relate to each other. By creating logical steps in your pricing and the value of each product, you can make it the intuitive choice for customers to trade up until they reach the maximum cost that they are happy to pay.

This type of structure can also make it possible for customers to continuously improve up to the top-tier product, whilst the higher-end features can influence the lower tier products, which reinforces the value and supports further price increases over the long term.

4. Use Decoy Prices

Consumer psychology is central to pricing and you need to be able to understand the irrational way that people make their decisions.

An example of this is that a reframe of a price by contrasting it with another can push the consumer to choose the option you want them to. Restaurants will often do this with their wine list. They recognise that most people will choose the second most expensive bottle of wine if there is a big gap between that one and the most expensive, but the profit margin on the second-best is still very healthy.

5. How You Communicate Price Rises

Finding a way of communicating price increases to your customers is one of the most difficult aspects of pricing.

If you are not clear and upfront, your customers may feel like they have been cheated and become hostile. On the other hand, if you are too direct, they may start focusing too much on the price rather than the value that they are getting from your business.

“Be sure to focus your communication on the new price rather than the old,” says Matthew Deane, an entrepreneurial advisor at Writinity. “Keep communicating the value that you are delivering, especially if you have made popular additions and amendments to the service.”

To soften the blow, find ways that you can improve the offering without increasing your costs. For example, giving away free downloads, or increasing the time they can access your online course.