Pricing

 Our process is to team with our clients to understand how price is affecting your business and how pricing can be set to maximize growth and profitability. How you set your prices can have a host of implications for your business. Not every price you set needs to maximize your margins. Many small businesses use price to compete, change market share or create different revenue scenarios. Understanding how pricing affects your business model, not just your bottom line, will help you better choose price levels.

Profit Margins

The price you set affects your profit margin per unit sold, with higher prices giving you a higher profit per item if you don’t lose sales. However, higher prices that lead to lower sales volumes can decrease, or wipe out, your profits, because your overhead costs per unit increase as you sell fewer units.

Sales Volumes

One of the most obvious affects pricing will have on your business is an increase or decrease in sales volume. Economists study price elasticity, or the response of consumer purchasing to a price change. Increasing your prices might lower your sales volume only slightly, helping you make up for decreased volume with higher total profits generated by higher margins. Lowering your prices can increase your profits if your sales jump significantly, decreasing your overhead expense per unit. Test the market’s response to price increases by changing prices in targeted areas before instituting an across-the-board price increase.

Position

The price you set sends a message to some consumers about your business, product or service, creating a perceived value. This affects your brand, image or position in the marketplace. For example, higher prices tell some consumers that you have higher quality, or you wouldn’t be able to charge those prices. Other consumers look for low-priced products and services, believing they’ll get the quality they need at a low price. Offering sales, discounts, rebates and closeouts can send the message you can’t sell your products or services at your regular price, or tell buyers they have a short-term opportunity to get a bargain.

Market Share

The price you set makes you more or less competitive in the marketplace, affecting your share of the market’s volume. Some businesses lower prices temporarily to gain market share from competitors, who can’t respond to and meet a price decrease. After consumers have had time to try your product and develop a brand preference or loyalty, you can raise your prices again to a level that won’t cause them to leave you. Predatory pricing is the practice of selling a product or service below cost for the specific purpose of taking market share away from a competitor or closing it down, then raising prices on consumers when they have fewer, or no options after that competitor is gone. This is illegal.

Loss Leaders

Some businesses price products or services at or below cost to get customers into their businesses, who then spend more money elsewhere. For example, big-box retailers might buy large quantities of tennis balls, selling them at or below cost to entice affluent tennis players who use many cans of balls during the year into their stores. By placing the low-cost balls at the back of the store, they hope to generate impulse buys as the shopper walks to the sports area and back to the front. Restaurants offer low-margin specials to offer a change-of-pace to regular diners to keep their normal business, or to let regulars bring friends who want upscale dishes at a moderately priced eatery.

There are many factors to consider when it comes to pricing your product or service. At Guidestone Partners, Inc., we can help you identify and evaluate all the options so that you can maximize your results. For more specific information about how we can help you, please see our budgets/forecasts section under services.