Determining how to price your products and services is a tough decision all entrepreneurs face. Small business owners — especially those just starting out — tend to price their products on the lower end of rivals’, thinking it will make them competitive and attract more customers. Contrary to this popular belief, however, this rarely proves true. In this post, we discuss pricing strategy and the three main reasons why cheaper may not always be better for your small business.
Competitors will undercut you. Entrepreneurs must understand a cheaper option always exists. Oftentimes, established firms will temporarily price their products or services lower than newer companies simply to obliterate them from the market. These firms are perfectly willing to lose a little money on price-cutting in the short-run in order to eliminate potential threats from the market in the long-run. That said, competing on low cost rarely proves a solid strategy.
Customers will pay for quality. People are willing to pay more for a better product or service. Create a memorable experience for clients, and rather than compete on price, differentiate yourself through better offerings, higher quality, superior features, and greater consumer benefit. Just because you’re not the lowest priced option in the market, doesn’t mean people won’t buy what you sell.
You will make more money selling one widget than selling 100 widgets. Rather than constantly relying on the low end of the market, instead focus on lower volume with higher margins. Selling one, better quality product at a higher price will yield more profit than selling multiple, inferior quality products at a lower price. This helps avoid price wars altogether, and positions you competitively in the market. Offer a product or service that is more difficult to replicate by competitors rather than making yourself vulnerable by competing solely on low cost.
Keep these three points in mind the next time you’re considering how to price your small business’ products or services. Remember, utilizing a low-cost pricing strategy makes you extremely vulnerable to competitors. You can charge more by offering better quality and a more memorable experience to customers. Feel free to share your comments below, or contact our SBDC office for help developing a pricing strategy for your entrepreneurial endeavor.
The Iowa Western Small Business Development Center is a free resource for small businesses and start-ups in Southwest Iowa. We serve seven counties – including Cass, Fremont, Harrison, Mills, Page, Pottawattamie, and Shelby – and provide consulting services to help businesses start, grow, and prosper.
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