Price is Right? Is it a numbers game?

The setting of prices is an important task for any company to assure competitive advantage and to create an attractive value proposition. Today’s businesses need to consistently find ways to attract customers through using a variety of price setting tools.

For small business, the ideal price point has to be low enough to retain customer interest but high enough to retain profitability. Here are some common mistakes to avoid when setting prices for your business.

1. Discounting vs value add: When a product line isn’t selling well, your first instinct might be to slash prices to attract greater customer interest. However, this could only be a short-term solution given a discount will cut into your profit margins. Instead, consider changing the product offering so it’s worth more to the customer. This kind of value-add will create new interest without detracting your bottom line.
2. Trying to undercut the competition: With a lower price, you’re likely to have higher sales volume. However, it could hurt your positioning in the long term. People are willing to pay higher prices to get higher quality. The reason people still pay more for brand names over generic products is the perception that those brands provide a reliable and superior product. Set a price point that achieves your profitability and focuses on your target customer’s needs.
3. Failing to recognize market segmentation: Different groups of customers are interested in your product for different reasons. Tailor your packaging, delivery, and marketing to each customer segment. The price point should reflect the part of the market you’re trying to appeal to as well. You could offer the same base product, packaged/offered differently to suit each segment. This is an effective way to boost profitability by limiting inventory and complexity in your operations too. 
4. Setting prices based on costs rather than on value: The price point should be related to what the market is willing to pay. Finding this point may take some analysis and testing. It’s about finding the customer’s perceived value of the product and then meeting that expectation. You’ll increase your profits by keeping your eye on this one. 
5. Using one profit margin for every product: Selling a high volume often does mean you can have a lower profit margin. Keeping costs low so a business could discount products, making only a razor thin margin on each, it works for businesses trying to attract a large segment of price-sensitive shoppers. Better to have a minimum margin and eliminate those that end up costing your profits. You sell what makes you money. Thus, a business fails to attract more high-end shoppers. There is risk in having too many high-volume items too.

Accounting 360 Solutions can help you effectively analyze and monitor your costs so that you always have the right information in setting your prices and profitability thresholds. Being on top of your back office finances ensures your small business can focus on meeting customer’s needs and not on admin issues. Contact us today to discuss how we can strengthen your company for long term success.