A competitive pricing strategy attracts customers to your small business because they feel like they're getting a good deal on your products or services. Developing competitive prices does not necessarily mean that you offer the lowest prices around. Instead, your prices reflect the quality of your brand, the demand for your goods and services and the prices of your closest competitors. In addition, you need to make sure your price points allow you to earn a profit.
To set optimum product prices, you'll need to perform a competitive pricing analysis. Start by gathering pricing data, researching your competitors and crunching the numbers. After you have the facts in front of you, it's time to make a judgement call, set a competitive price and gauge how consumers react.
Understanding Competitive Pricing: Crunching the Numbers
It doesn't matter what your competitors' prices are if your business cannot afford to keep the lights on despite record sales numbers. Therefore, the first step in choosing a price is to understand your expenses and current sales numbers. Calculate your total cost for fixed expenses each month: rent, utilities, employee salaries, subscriptions to business tools, etc. Then, calculate your variable production costs, or the inherent costs associated with producing and selling one unit.
If you sell 300 units in a month, what are your total expenses, and what's the minimum price per unit that will allow you to recoup those expenses? Multiply the variable costs per unit by 300 and then add in the total fixed expenses. Divide that total number by 300 to calculate the "cost per unit," or the absolute minimum price per unit that would allow you to break even that month. Substitute different numbers of sales to create a chart that shows how an increase in sales changes the minimum price per unit.
Use your current sales figures to help you create a realistic scenario. Try not to go overboard and assume you can make 1,000 sales in a month when you currently make only 500 sales. Landing extra sales will inevitably cost extra money, either through new sales hires or by launching a new ad campaign. The goal at this point is to get a clear picture of how your sales affect your bottom line and to establish a minimum sale price.
Scoping Out the Competition
A competitive pricing strategy requires you to understand exactly who your competitors are in terms of value. For example, if you sell handmade soaps, Walmart is technically a competitor because it also sells soap. However, it isn't your closest competitor because it doesn't provide the same value as your business: handcrafted, locally produced, organic, specific scents and shapes, etc. In order to accurately compare prices, discover competitors who provide similar products or services.
In addition to considering the value provided by your competitors, be sure to also factor in location if you are a local business. Prices tend to be higher in certain pockets of the country, so it's not appropriate to compare your New England soap company to a soap company in West Virginia. Instead, look for competitors that also cater to your region. If you operate on a national scale, you can research prices from other national companies as well as calculate the average prices from a variety of local competitors.
However, it's still important to consider online prices. Even if you don't have an e-commerce store, it's very easy for your local audience to get online and find products for a low price from companies that are thousands of miles away. Pretend you're a customer and do a web search for your products to see what prices are available. If applicable, visit sites like Etsy and eBay to do a price comparison as well.
Analyzing Competitor Prices
Once you've found competitors who closely match your company in terms of value and location, take a look at their prices. Ideally, their item will sell for a higher price than your calculated cost per unit. If they have lower prices than your cost per unit, you might need to revisit the drawing board and figure out how to produce items more efficiently or reduce your fixed expenses in order to successfully attract customers with competitive pricing.
You don't want to give potential customers an easy reason to purchase from your competitors by overpricing your inventory, but you do need to make sufficient profit. Start by calculating how much profit you would make if you matched your competitors' prices. Would matching their prices give you adequate profit margins? How much higher would you need to adjust the prices to make an expected profit?
Most buyers won't quibble over a dollar or two, but a price difference of $5 could sway the budget-conscious customer to choose your competitor. The exception is if you sell luxury items and cater exclusively to a high-end customer base, in which case a price difference of $50 or even $500 won't disrupt the buying process. Know your industry and your target market in order to establish the best prices.
Running Sales and Giving Discounts
In addition to researching and analyzing your competitors' everyday prices, keep an eye on their sales and discounts. Some brands run "sales" or offer discount codes with such regularity that the everyday prices become moot. In fact, some of your competitors may be using the word "sale" as a marketing gimmick and never actually sell the product for the market price.
Should you run a sale at the same time as your competitors? Not necessarily. Track your revenue in relation to your competitors' sales events in order to definitively determine whether consumers are choosing to shop with your competitors during those times. If your profit stays the same regardless of whether your competitors run a sale, don't worry about counteracting their discounts with your own.
Similarly, if you run a sales event and find that you get quick gains but don't secure long-term gains, it may not be worth spending time and money organizing and advertising a sale. This can occur when new buyers are attracted to the discount prices but don't develop any sense of brand loyalty. As such, they don't return to make another purchase. However, your usual customers would have purchased from you whether you offered the discount or not.
How Economies of Scale Affect Prices
Finally, consider whether a competitor is benefiting from economies of scale. When a business scales up its production capacity, its cost per unit inevitably lowers because the fixed expenses stay the same. Businesses that have been around for years may have developed efficient processes and economies of scale, allowing them to mass produce their items or provide a large number of services for a lower cost. You may not be truly competitive until you're able to match the scale of their business.
Remember that competitive pricing isn't the only factor that attracts customers to your brand and keeps them coming back for more. Buyers also value courteous and knowledgeable customer service representatives, quick shipping times for e-commerce stores and convenient locations and hours for brick-and-mortar stores, among other factors. Marketing strategy also plays a crucial role in increasing your sales. If your company isn't generating adequate profit, competitive pricing is just one piece of the puzzle that may be awry.
Cathy Habas specializes in marketing, customer experiences, and behind-the-scenes management. Cathy has contributed to sites like Business and Finance, Business 2 Community, and Inside Small Business. She served as the managing editor for a small content marketing agency before continuing with her writing career.