How to Set the Right Prices as a Small Business – and When You Need to Adjust Them

22 Jul 2024

In this guide:

Pricing Your Products and Services
Choosing a Pricing Strategy That’s Right for You
Adjusting Your Prices – When and How

As obvious as it may sound, setting the right business prices is a crucial thing for any company to do. In many ways, it really defines your business – and its place in the market.

How much do your products sell for? What do you charge for your services? Cost is one of the main considerations your customers will have, so the process of setting prices needs to be arrived at properly. No one should pluck figures from the air and guess!

That being said, setting the right pricing model can be a challenge. This is especially true for start-ups or relatively new companies, with many missing out on crucial profits when they don’t get their initial pricing right¹.

Understanding how to set the right business price can have a direct benefit on your profits and bottom line. In this guide, we’ll show you how to select a pricing strategy, and explain when and why you might want to consider adjusting prices.

Pricing Your Products and Services

Your pricing model should be one of the earliest things you discuss and decide when launching your business, coming up with a new product range or service, or making a major change such as a company rebrand.

When arriving at the pricing of your products, and the pricing of your services, give some thought to the following factors:

Calculate your costs

Before you can work out what you should charge, you first need to understand how much you will be spending to provide a product or service to a customer.

There are generally three things involved in the costs of providing a service:

Cost of materials
Cost of labour
Cost of overheads

Use these to calculate your overall costs. For example, if you run a restaurant you should work out the cost of ingredients, wages for kitchen and serving staff, plus rent, equipment and energy bills.

Once you know how much you’re spending every month, you can start to understand how much you need to charge.

Analyse your competition – and the market

Whatever line of business you’re in, no matter how strong your offering, it’s important to analyse your competitors.

Find out what prices they charge, and factor this into your decisions so you can remain competitive.

It’s rarely as simple as ‘undercutting’ the competition by making your prices a lot cheaper, however. After all, that will impact your profits and ultimately hurt your bottom line.

Instead:

Consider what you offer that your competitors don’t
Take some time to understand the market – and whether there’s a particular demand for what you provide
Conduct market research to find out what people are willing to pay

Consider your customers

On that note, it’s ultimately the customers you need to convince with your pricing model – and they won’t always make a purchase decision based on price alone.

If you’re running a gym, offering a lower-price membership may not be the catch-all win you think it is. Potential customers might actually be happy with a higher-priced membership if it comes with better, more modern facilities and a wider choice of classes, for example.

Work out your profit margins

Profit margins should be a primary consideration when setting prices. When it comes down to it, you want to be bringing in more than you’re spending – and by a decent amount if possible.

But it’s a balancing act of course. Higher prices might mean bigger profits in theory, but they could result in lower sales.

Be clear on your margins from the get-go – use a simple calculator to help, if you need it. Then, you can look at ways of boosting your profitability as you move forward, as well as keeping an eye on your cash flow.

Do you wan to attract more loyal customers and increase your brand awareness? Find out how.

Choosing a Pricing Strategy That’s Right for You

A pricing strategy should never be an ‘afterthought’. Fortunately, there are several popular and established pricing models that many businesses use.

Here are a few you could consider.

Penetration Pricing

This tactic sets prices low to begin with, and then raises them later.

Pros: It can be beneficial because you can attract a high volume of new customers with discount prices.

Cons: The potential drawback is losing these customers later when the price increases. You also risk ‘selling yourself short’ to begin with.

Price Skimming

This is the opposite of penetration pricing and involves setting a high price on goods, then reducing it over time – and in the face of competition.

Pros: This works well when demand for a new product or service is high. Cons: Customer loyalty can be impacted if people feel they’ve been paying over-the-odds to begin with².

Premium Pricing
Go in high, and stay high, confident that your brand or business has the quality to justify the price.

Pros: This can work well for a top-class restaurant or spa, where luxury and elegance are emphasised at every turn – and discerning customers are willing to pay high prices.

Cons: The challenge is maintaining quality, and running the risk of being targeted by competitors. Pressure to achieve and maintain outstanding reviews, awards or other accolades can also be high.

Competitor Pricing
This approach involves basing your prices largely on what your competitors charge for similar products and services.

Pros: It’s unlikely your customers will be able to buy your products or services significantly cheaper elsewhere.

Cons: Tying yourself too closely to competitors means you fail to account for what you do differently, and it can make your company inflexible. If competitors go too low or too high, can your business adjust?

Adjusting Your Prices – When and How

Even when you’ve set the right prices for your small business, it doesn’t mean you can’t raise or lower them when circumstances change.

Adjusting prices can be extremely important when you face a number of different scenarios, such as:

Higher costs

If your business costs go up – perhaps because you have taken on more staff, moved to new premises or production prices are on the rise – you may need to look at your profit margins and pricing again.

Increased demand

Business is booming and demand is beginning to outweigh supply. Fantastic! You could start moving prices upwards, because customers clearly want what you’re selling. You may also need to step up production to fulfil a spike in orders and cover these costs accordingly.

Reduced competitor pricing

Be prepared to lower your costs if the competition slashes their prices. You may need to do the same to avoid customers going elsewhere.

Surplus stock

If you have seasonal products that haven’t sold yet, or you’re going to launch a new product and need to get rid of existing, less-profitable inventory, you might cut your prices significantly to move these items on.

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