Pricing Strategy

If you can't meet profit expectations and other metrics, start asking yourself serious questions about your company's pricing strategy.

Common sense pricing is not always common in practice -- due sometimes to lack of knowledge of how to set prices, but much more frequently simply to bad assumptions based on the unquestioned acceptance of prevailing myths and rules-of-thumb.  Pricing determines the profit of your business both directly -- as the result of revenues less costs -- and indirectly -- in its influence on stakeholder (customer, vendor, employee, investor, etc.) perceptions.

Hiking prices is risky, especially during tough times, but many businesses have little choice.  The trick is to give yourself some breathing room without losing customers to lower-cost competitors.  Here are some ways to make your price increases effective and understandable to your customer base:

Don't raise everyone's prices the same amount.  The simplest tactic is to hike prices only for new customers.

Determine which customers are low-margin clients--those who take up more of your time than is actually cost-effective--and pass price increases, in the form of add-on consulting or handling fees, on to them.  When you are at risk of losing a customer, let it be a low-margin client.

For your services, stop charging by the hour, for example, and move to a half or full day flat fee.  If you are charging by the month, charge by the quarter of a year.

Reduce your unit costs by reducing the size of your product without lowering the price of the product.  Also, look for opportunities to become more efficient in your business operation.

If you believe your customers' loyalty is to price alone, you are destined to wind up in a "How long can we go at low-margin pricing?" battle with your competitors.  If your competitors are larger -- or better financed -- or better connected -- the odds are overwhelming that you'll lose.

Every business must receive an adequate gross profit from each sale to pay for corporate overhead, reasonable wages and the selling expense of telling the market the value of its products and services.  If fact, you must be willing to risk losing orders (regardless of their perceived importance) if the sales revenue can not be obtained at prices that yield a reasonable gross profit.

Source: BusinessWeek, SMALLBIZ, November 2008