Effective Pricing Strategies For Small Businesses

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Effective Pricing Strategies For Small Businesses

5 min. read

Jun 4, 2024

There’s no question that pricing is one of the most important aspects of a business. It is of even greater importance for small businesses as the margins are usually tight, and the competition is fierce. An effective pricing strategy can mean the difference between profitability and failure but the question is, how should it be tackled?
Well, this blog is going to be your small business pricing guide which will take you through the various pricing strategies, their advantages, and disadvantages; and how you can implement them effectively for your business. Along the way, you will find small business pricing tips that will help you distinguish your business from the rest.

Before getting into the specifics of pricing strategies, it's essential to understand the basics of pricing. When it comes to pricing it is not just about covering costs and making a profit; it's also about positioning your product in the market, attracting customers, and building a sustainable business.

While choosing a pricing strategy there are a few things you need to keep in mind:

Cost: This includes both fixed and variable costs. Understanding your cost structure is crucial as it sets the floor price of your product.
Value Perception: How much are your customers willing to pay for your product based on its perceived value?
Competition: You need to keep in mind the prices set by competitors for similar products. Should you go lower, higher or offer the same as your competitors and what impact will it have on your brand?
Market Demand: The level of demand for your product in the market is something that must be accounted for.
Business Goals: Your overall business objectives, such as market penetration, profit maximisation, or brand positioning.

Now let’s look at some common pricing models for startups

Cost-Plus Pricing Strategy
This strategy is one of the simplest pricing strategies where you add a fixed percentage to the cost of the product to decide the selling price. It’s easy to calculate, ensures that all your costs are covered and includes a profit margin. But the downside is that it ignores market demand and competition. It may result in prices that are either too high or too low compared to competitors which may drive customers away.

The Indian makeup brand Colorbar uses this strategy effectively. Its products are priced reasonably so that they are affordable to the masses but also not so low that they appear as a sub-quality brand. This has gained the brand great popularity within the Indian market and is a great reference in understanding how to price products for a small business.
Competitive Pricing Strategy
For this, you need to set prices based on what competitors are charging. This strategy works well when you have a lot of competitors. It can give you an edge over your competitors by attracting price-sensitive customers. However, it will drastically reduce your profit margins.
If your products are easy to make, you could consider this strategy but if your product is unique, it may not reflect the unique value of your product.

For example, Bonkers Corner’s pricing strategy for products is one of India’s fastest emerging streetwear brands, offering its customers a wide range of trendy outfits but at a lower price. The brand's unique value proposition is that its consumers can find every style they want under one roof and compare the prices in one place. Since there are numerous other streetwear brands that already exist in the Indian market, its pricing strategy is able to set it apart from the rest.
Value-Based Pricing Strategy
This pricing is based on the perceived value to the customer rather than the actual cost. This means that if your product is unique and something that your customers would go out of their way to acquire, you can markup its price to the extent that you believe they would value it. This is a dynamic pricing strategy that can ensure higher profit margins and make your product stand out but it’s only a viable option if your product has a strong value proposition.

Take Bhavya Ramesh for example, which is a new-age accessory brand that fuses traditional art with present-day aesthetics. These products are unique and cannot be obtained through any other means than a direct purchase from their store which is why they are able to offer value-based pricing.
Market Penetration Pricing Strategy
This is a useful strategy when you’re starting a new business or introducing a new product and want to get people to try your product. All you have to do is set a low price to enter the market and attract customers quickly, and once people have had a taste of your product you can gradually increase the price. The downside is that you will face losses initially.

Haldiram’s initially priced its wide range of Indian snacks, such as namkeens and sweets, very competitively to penetrate the market. By offering high-quality snacks at affordable prices, they quickly gained a loyal customer base, leading to significant market penetration and brand recognition. Post this they raised their prices so as to increase their profits but maintained it at a level that would still keep its products accessible.
Skimming Pricing Strategy
This involves setting a high price initially and then gradually lowering it. This can be done if you’re the first to offer customers a unique product because they would be willing to pay the markup price to get their hands on it. As you build a strong customer base and other competitors enter the market, you can eventually bring the price down. The plus point of this strategy is that you can maximise your profits during the early stages.

When OnePlus phones first entered the market, they were sold at high prices through an invite-based model. This positioned the brand as premium and created a high demand for its products. However, since the brand gained a good market share it has begun to offer its phones at affordable prices.
Psychological Pricing Strategy
This pricing technique considers the psychological impact on customers, like setting prices at ₹9.99 instead of ₹10.00. You’ve probably seen it done before and probably even fell for this strategy. But there’s a reason that it’s overused, it convinces your customers that your product is less costly than it actually is. This pricing strategy can be used across almost all brands in India.

There are a few psychological pricing strategies that can help you increase your sales:

- Charm pricing: This pricing strategy involves setting prices that end in the number nine, leveraging the "left-digit bias." This psychological phenomenon causes consumers to be disproportionately influenced by the left-most digit of a product's price. This means that if you price your product at ₹499 instead of ₹500, customers will automatically round it off to ₹400 instead of ₹500.

- Odd-Even pricing: Odd pricing is often more popular because it creates the impression of a deal in customers' minds, increasing their likelihood to make a purchase. So if you price your product at ₹450 instead of ₹500, they will assume it is due to a discount.

- Decoy Pricing: The decoy pricing tactic leverages the "decoy effect," where individuals' preferences between two options shift when a third, inferior option is introduced, which is only superior in one aspect. For example, if you list socks at ₹30, stockings at ₹60 and both together for ₹100, the expensive third option makes the first two options look more affordable.

You can use the coupon feature and discount feature on your SmartBiz website to integrate these pricing strategies, prompting your customers to make a purchase.
Bundle Pricing Strategy
This involves offering several products together at a lower price than if they were purchased separately. This pushes your customers to purchase more products during each checkout even if their initial intention was to buy just one.

Sugar Cosmetics does this to increase the average spend of its customers during checkout. By offering customers a discount if they purchase for a certain amount, they push their customers to add more products to their cart before making a purchase. This has proven to be very effective in increasing their profits.

As you can see there are numerous pricing strategies that you can adopt for your business but it’s important that you choose the one that works for your business.

For that, you need to:

Understand Your Costs
Start by thoroughly understanding your cost structure. This includes both fixed costs like rent and variable costs like material or shipping. Knowing your costs helps you set a minimum price point that ensures you cover all your expenses.
Research Your Market
Look around and try to understand your competitors' pricing, demand for your product, and customer preferences. Tools like surveys and focus groups can provide valuable insights.
Define Your Value Proposition
Clearly define what makes your product unique and valuable to customers. This could be factors like quality, convenience or anything that sets you apart from competitors.
Choose Your Pricing Strategy
Once you have understood your costs, conducted market research, and decided your value proposition, choose the pricing strategy that best aligns with your business goals. Remember, you can combine different strategies or adjust them over time as needed so it’s okay to test different strategies till you find what works for you.
Monitor and Adjust
Pricing strategies for new businesses involves continuously monitoring your sales, customer feedback, and market conditions and always being prepared to adjust your strategy as needed to stay competitive and profitable.

Effective pricing strategies are crucial for the success of small businesses. By understanding your costs, researching your market, defining your value proposition, and choosing the right pricing strategy, you can set prices that attract customers and maximise your business's profitability.
Pricing is dynamic and should be regularly reviewed and adjusted to align with changing market conditions and business goals. Implementing discounts and pricing strategies thoughtfully can help your small business thrive in a competitive market, ensuring long-term sustainability and growth.