Pricing for profit in a small business

There are many different factors that influence the ongoing sustainability of a small business. One of the most significant factors is pricing. In a hugely competitive small business environment, there is no other marketing tool that more immediately affects customer acceptance, cash flow, and even the overall success or failure of a business.

Pricing policies should not merely be taken as a price somewhere between the price charged by suppliers and the price charged by competitors. Good pricing policies allow businesses to compete better and ultimately generate more profit.

Pricing decisions within a business directly affect profitability. Therefore, any pricing decisions should be made by management and not dictated by competitors. It is a function of overall marketing, sales and financial decisions and can be used to set a combination of one or more corporate goals. Pricing decisions can be used to increase sales, to win market share, to maximise cash flow, or to lower demands to satisfy capacity restrictions.

When making any pricing decisions, some of the following factors should be considered.

Cost

Cost should be the starting point of all pricing decisions. All direct and overhead costs must be considered for each product or type of service.

Customer

Customer acceptance to a product is hugely influenced by price. Therefore, pricing decisions should be made with the customers in mind. However, keep in mind that customers also consider other factors including quality, existing business relationships and brand loyalty, which provide some ground for price flexibility.

Competition

When making pricing decisions based on competitors’ prices, make sure that decisions are made carefully based on the buyer’s perspective. Customers may have a different view on who your competitors really are. Input from customers will help determine your competition and make pricing decisions which allow your product to compete better.

Compatibility

Pricing is not a stand-alone decision. As mentioned, pricing decisions should take into consideration the corporate goals as a whole. What are your sales goals? What are your production goals? What is the image you want to project to customers?

Success in the pricing area is a major step to a more profitable business. Therefore, understanding the theory behind product pricing and being innovative in the price setting process can make a huge difference for any organisation.

Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contact Peter Macks at Macks Advisory on 08 8231 3323 or email to pmacks@macksadvisory.com.au.