Running a Small Business

Lesson 1: Setting Prices

Adjusting your prices

One way of measuring your possible success is whether any competitors pay any attention to you. If you find them reacting to your presence in the market, you must be doing something right. That's typically what happens - you choose your target market, research what the competition is doing, set your pricing just right and start getting orders. Of course you're taking those orders away from someone and they're not going to be happy. They're going to change their pricing, probably lower it to get some of those orders back and keep what they have.

If you have an inherent price advantage you may be able to succeed by competing on price but, for most small businesses it doesn't make sense to match or undercut a business which is competing on price. They're competing on price because they have a cost advantage over you and you'd be foolish to get into a price war with them. In any case, you'll probably just bid prices down to where both of you are losing money, have to cut corners and everyone loses.

In most situations like that you can either leave your price the same or raise it. What you do depends on what the market is doing. If competitors are lowering their prices and your business is largely unaffected, that means your customers are willing to pay extra for some of the advantages which you have built into your product. Just leave everything as is and ignore any price cuts. This also sends a strong message to your customers that this is a solid, fair price for your product or service and you won't change it.

If you're starting to lose business, then you have to do something. If you're not going to lower prices because it doesn't make sense as we've seen above, you'll have to do something else. Knowing your market becomes important here. You should know the advantages and disadvantages of your competitor in the target market. You can leave your price the same and promote those of your advantages that are his disadvantages. If he's further away, promote your proximity. If he's not qualified, promote your qualifications etc.

This kind of action is effective but it's defensive. You're reacting and your competitor may simply drop his prices some more to see what you do then. If you know your market, your potential customers and your competition well, you can use another strategy which takes the initiative. You can raise your prices but add some high value to the package. Perhaps you introduce a new model with superior characteristic or give another product away for free with each order. If you're in service, you add something your customers would normally have to pay for or you guarantee better, faster service. What you're doing is sending a message to your customers that you're not actually in competition with the business which is cutting prices because you're so much better. And to your competitor you're saying that you're not going to play this game.

This strategy takes over market leadership but it will only be successful if you know what you're doing in terms of customer needs, what they value, what your advantages and disadvantages in the market are and those of your competitors. Once you have a clear understanding of these factors, you're no longer at the mercy of your competitors as far as pricing is concerned and you can adjust your pricing to meet your financial goals while giving your customers good value.

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