Billionaire and renowned investor Warren Buffett once said, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” Most entrepreneurs would agree that one of the primary goals when entering a market is obtaining pricing power, or the ability to increase prices while maintaining consumer demand. Yet many entrepreneurs and small companies lack a formal strategy to guide their pricing decisions.
This lackluster approach to pricing is likely attributed to a fear of upsetting customers or (worse) losing them to competitors. Nevertheless, as a small business and entrepreneur, it pays to develop a solid approach to setting, justifying and, when necessary, changing prices to rates that provide real customer value and generate sales.
1. Raising Prices
Adjusting prices without alienating or upsetting existing customers is a challenge that can have serious ramifications on your business if not carefully analyzed, planned and executed. Research shows that consumers view the lower price of a good or service as the reference point for what’s fair and reasonable. Consequently, when prices are raised, customers feel overcharged.
Pricing experts such as Michal Ann Strahilevitz, Executive Director of the Baiada Center at Drexel University, suggest that, before raising prices, entrepreneurs should consider certain promotional tools to win over customers, protect their brand and prevent major losses to competitors. Some of these sales tactics include:
- Offering a return policy with a money-back guarantee.
- Giving free or discounted shipping to customers who make large purchases.
- Including a free product or product add-on with customer purchases.
Additionally, timing is important when deciding to raise or lower prices. For example, retailers often increase prices during the holiday season since shoppers tend to be less sensitive to higher price tags. However, for B2B (business-to-business) organizations such as software firms, raising prices may make more sense when timed with the release of new models and product versions.
Overcharging or gouging customers should never be part of a pricing strategy. By doing your homework and determining the level of need for your product, you can more accurately gauge customers’ perceived value of your products.
Speak with industry peers, review pricing guidelines, and stay abreast of survey results that reveal average pricing for your industry. Being able to link pricing to the value of your product or service will weigh heavily in your ability to increase prices successfully. Strong differentiators, appealing features and other benefits that resonate with your target market are all powerful tools for justifying higher prices.
Frozen yogurt and ice cream maker Ben & Jerry’s is a prime example of how charging premium prices can still create a loyal customer base and sustainable business. Compared to its competitors, Ben & Jerry’s justifies its higher price point by marketing its use of “wholesome and natural ingredients” and dedication to the environmental and social causes. If they’re compelling enough to customers, differentiators such as these can convince your customers that your product is an affordable value worth paying for.
4. Lowering Prices
While offering the cheapest option can retain and win customers—especially buyers whose purchasing decisions are based solely on price—lowering prices has its dangers as well. Moreover, recent findings reveal that consumers often connect pricing with quality. In other words, discounted products and low-priced services are often viewed as being of lower quality or having lower standards compared to similar but higher-priced goods and services.
For example, freelancers who charge a lower rate than competitors may inadvertently send the message to potential clients that they’re inexperienced or desperate for cash. In contrast, consultants who charge rates on the higher end of the spectrum send the message—whether true or not—that their rates are reflective of the level of quality they promise to deliver to clients.
Despite the perils of lowering prices, there are certain circumstances that may warrant a price reduction, such as when the following occurs:
- Consumers have little or no need for your product or service. If your company is offering something that is a luxury or bonus item rather than a necessity, then you may need to drop prices to convince consumers otherwise.
- Your product or service lacks strong differentiators.Besides addressing their needs, you must convince customers why your product or service is better than what the competition is offering. If your marketing and advertising fail to rise to this task, then lowering your price may give consumers extra incentive to choose your product.
Like promotion, product management and distribution, pricing must be incorporated into your marketing and sales strategies. How you change your prices is just as important as the decision to lower or raise them. Link your pricing strategy not only to customers’ needs, but also to the value they perceive in your product or service. Although data on demographics and customer preferences are hard to come by, this information is invaluable when it comes to setting your prices.
Final Thoughts on Pricing and Value
While minimizing costs and competing with brands at similar price points are important, companies with significant pricing power typically set prices based on perceived and actual customer value. By developing a deep understanding of customers’ desires, pain points and perception of value, you can increase customers’ willingness to pay for this value rather than for a lower-priced alternative.
Engage in marketing tactics that will communicate this unique value. A strong marketing strategy should provide your sales team with the tools and information it needs to sell at a price point that’s profitable but still accessible to your target market. This means educating customers on the unique benefits and features of your product or service before convincing them that the value is commensurate with the higher price tag.
Transitioning from competition- or cost-based pricing to pricing based on customer value is long and arduous, and it requires significant changes at both the sales and organizational levels. To move from a reactive strategy to one where you can adjust prices without negatively impacting customer demand, base your pricing decisions on established processes and consumer intelligence, rather than on quick judgment or “gut instinct.”