5 Steps to Profitable Pricing

Don't be afraid to set your prices at what your products are really worth. Here are five steps to profitability.
April 13, 2012

Maximizing profits might be a matter of having enough courage to set prices high enough.

"Most small businesses are afraid to charge what it's really worth," says Andrew Gregson, author of Pricing Strategies for Small Business. Customers tell small business owners that prices are too high, so business owners respond by dropping prices—until they don't make any money.

To avoid that fate, here are five steps that will help small business owners price products profitably.

1. Check out your competition

You need to find out what competing businesses are charging for similar products. "If you're doing something where there is a lot of competition, then you need to know what your competitors are doing," says Mark Chussil, founder and CEO of Advanced Competitive Strategies.

This doesn't mean you need to match or beat their prices. But you need to understand what the market is for your business. "Take a tour of the competitors in your area. See what the experience is like there," says Chussil. "See what it is that you're doing different, or what could be different."

2. Dare to be different

"You have to find a way to differentiate yourself and prove the value in what you're doing," says Gregson. If your business is selling the same product as many other competitors, then you're selling a commodity. Commodities are hard to sell at a premium unless you do something to differentiate your business.

"People are willing to pay for convenience," says Chussil. This is how your local neighborhood mom and pop can charge higher prices than the big grocery store a couple of miles away. Also look for ways to deliver a higher level of service or package your products in a way that's hard to compare to what competitors offer.

3. Put a premium on packaging

Package your products together. Add services or features. The total price can be more than the sum of the parts. For example, gift baskets are a bundle of many products in an attractive package at a price that's higher than if the items are sold separately. "That's relying on the fact people will pay more for a gift than they will for themselves," says Gregson.

Not every package needs to be in a gift basket. Adding features like free delivery can help differentiate products from what the competition offers.

4. Anchors away

Don't start by offering your lowest-priced products. That will be the anchor that sets customers' low expectations. "Never move up. It just doesn't work," says Gregson.

Start with the most expensive product with the most benefits. If the customer balks, move them down to the product that matches what they want. More often they will pull out their wallets before they reach the most economical choice.

5. Reap the rewards

"The price that you charge sends a signal to the customer," says Chussil. If it's higher than what customers are used to paying, they will either walk away or wonder what you're doing to make it worth the higher price. They perceive the high price as a sign of value. And when customers commit to paying a higher price, they will promote the product's value. "If you're going to pay a lot of money for it, you're going to defend it," says Gregson.

Believing that customers want to pay more money does take courage. And being different. "You have to find that unique selling proposition," says Gregson. "If you don't have that, why are you in business?"

Carl Natale blogs about how small business owners can develop and improve their businesses. He shares ideas and tips on CarlNatale.com and as @CarlNatale.