Setting prices for your products or services is among the first steps every small business owner takes when starting out. But pricing strategy is an ongoing process.

“While various factors can affect a business’s revenue potential, one of the most important factors is its pricing strategy,” says a post by Intuit’s QuickBooks.

It’s critical to analyze financial data and external factors when you’re deciding on your pricing strategy, looking at things like market conditions, price of goods, competitors’ actions, consumers’ ability to pay, as well as input, production and distribution costs.

“But, just as important is how well you know your target audience and how much they value what you offer,” says Rieva Lesonsky, president and founder of GrowBiz Media, in a post for Small Business Trends.

Here’s a look at approaches and insight as you set out to determine pricing strategies for your small business.

The Power of Pricing

Your pricing plays a huge role in your profitability but it’s especially valuable to your bottom line during a crisis, such as the coronavirus pandemic or other economic turn.

“Yet, most organizations devote much more time and effort to cost-cutting than to improving pricing,” says international consulting firm Iris Pricing Solutions.

If the average company captured 1% more in price, without any change in volume and costs, profit would climb by 12.5%, the company says in a blog.

Under normal circumstances, the value of capturing 1% more in price results in a profit increase of between 8 to 9%, the blog says.

But during the 2008 economic crisis, it says, the average profit margin was down to 4 percent and on average, a 1 percent improvement in pricing resulted in a 25 percent improvement in the bottom line.

Not Always About Profit Margins

Maximizing profit margins is what most businesses are aiming to do with pricing strategies but there’s a time to look beyond the bottom line as a driving factor.

“Contrary to popular belief, pricing strategies aren’t always about profit margins,” says a pricing guide by QuickBooks.

“For instance, you may opt to set the cost of a good or service at a low price to maintain your hold on market share and prevent competitors from encroaching on your territory.”

But this approach – sacrificing profit margins in order to focus on competitive pricing – can get tricky.

“A good rule of thumb to remember when pricing products is that your customers won’t purchase your product if you price it too high, but your business won’t be able to cover expenses if you price it too low,” advises QuickBooks.

Value Pricing

Consider this approach if your business is seeing sales declining due to external factors, like a sharp increase in competition or a recession.

“This pricing strategy works because customers feel as though they are receiving an excellent ‘value’ for the good or service,” says the guide posted by QuickBooks.

“The approach recognizes that customers don’t care how much a product costs a company to make, so long as the consumer feels they’re getting an excellent value by purchasing it.”

Customer perception is another external factor that may force the value pricing strategy.    

“This pricing strategy could cut into the bottom line, but businesses may find it beneficial to receive “some” profit rather than no profit,” says the QuickBooks post.

Premium Pricing

This is when businesses can set costs higher because they have a unique product or brand that no one can compete with. It works in the luxury car market for companies like Tesla.

“You should consider using this strategy if you have a considerable competitive advantage and know that you can charge a higher price without being undercut by a product of similar quality,” the QuickBooks guide says.

It takes hard work for this strategy to be successful. You need to create a perception of value, to convince customers to see your products or services as worthy of this higher value.

“Along with creating a high-quality product, owners should ensure that the product’s packaging, the store’s decor, and the marketing strategy associated with the product all combine to support the premium price,” advises QuickBooks.