Everyone has a beginning point. And most beginnings are humble. If you are one of those, who run a small business, and look to grow in volumes and value over the year, this is a must read for you. It doesn't matter whether you are a manufacturer, trader (wholesale and retail), or a service provider, you do whatever you do for one thing, generating revenue. Every revenue generation model, is backed by a pricing model. How do you price your product or service?
Most small business owners, have an erratic pricing model. The pricing model is compromised for, when the want of business is the need of the hour. The result is, small businesses make money in few deals, and lose a whole lot in other deals. The size of the business, makes it a soft target to potential buyers, who might want to exploit you, no matter how good your product might be. Most businesses give into such pressures, and are lured by the volume, and the cash generation such exploiters promise.
Another mistake made by small businesses is that, they sometimes price the product so low that it sparks off a price war. The biggies have enough margins and volumes (and also bargaining power with suppliers), that they can afford to cut down prices, to win back the lost share. A small business, cannot afford to do a further price cut, as it would directly point at losses.
Here are few pointers, you would like to consider before making your pricing model:
- Price is the last, but in most cases, one of the most important factors, affecting buying decision.
- Price should justify the value of the product (tangible, and intangible).
- As a small business owner, you might have relatively lower overheads than the biggies, which means you can offer products at lower prices.
- Lower overheads should also not translate into ridiculously low price point, which would affect future upscalability.
- Since you are small, the market might try to take advantage of it, and exploit you. Arrive at a cost for all your products(Hint: Be liberal with the costing, even if it means inflated costs). Once the cost is arrived, decide on a bare minimum price point (read lowest margin acceptable), and do not budge to sell below that, no matter what the pressure might be.
- If you are a manufacturer, you might be approached by clients for products to be delivered in their branding. Depending on whether you want to enter into the OEM model or not, you can accept to sell at a bare minimum margin. (Most OEM orders are bulk volumes).
- Avoid getting into price wars. At the end both you, and the competition would regret it. Price wars wreck havoc in any industry. The downward spiral of prices, will bring down the average selling price to such a low point, that lifting it beyond that, will be an impossible task in the future.
- Every market has an Maximum accepted price, or a ceiling price. This is not the price of the most expensive product available in the market. This is the highest price at which the buyer is willing to buy. A study, and competitive analysis in this regard will do a lot good.
- If you are a service provider, be clear with the client(s), and draft a service agreement/contract, which clearly states how much the client would be paying, and for what. Stick to the agreement like the Bible.
- Constantly review and re-work your pricing strategy, to accommodate changes costs/other rises/falls.
- The pricing strategy employed, should at the end of the day, ensure that - a. It justifies the value of the product
b. The product/service sustains in the long run
c. The business makes a margin