A question that frequently comes up in my counseling sessions is, “What can I charge for this?” After a few discussions and cost gathering, we arrive at a true cost. Honestly, there are only three pricing strategies a small business owner can use in any situation: everyday low price (EDLP); high price, high value; and market parity.
EDLP is the strategy typically adopted by the big discount chains in which they advertise the lowest price. Here the plan is to achieve high sales with low profit. It is a strategy to grow market share, remain competitive or restrict new competition. But it is a hard one to maintain as a small business owner, as a downward spiral on pricing may develop that creates lower and lower profit margins. Main street businesses typically do not have the resources to take on the big chain stores, so this strategy is typically not the one they use. It does not mean a small business can’t conduct a temporary sale where it might have the lowest price, but sustaining that price point would be difficult to do. A small business could help control costs by joining a cooperative to increase buying power, work with suppliers to create special events where their products are prominently featured in the store and in advertising or take on new lines with marketing support from the supplier. Price-sensitive shoppers are the best target for this pricing strategy as they have the lowest service expectations.
The second method is higher price, high value when compared to the competition. Here the small business owner can certainly compete because of the high degree of value that can be added to the purchase. In this situation, the store is constantly seeking ways to improve the quality of the experience when a customer is shopping, buying and using the purchased product. When compared to a big chain, small business customers usually feel they are getting taken care of better — that is, they're able to get answers to questions from knowledgeable employees who will take the time necessary and provide service after the sale. Most people state they are willing to pay more if they are assured of a quality experience, customer service and support after the sale. This strategy often creates the belief that products purchased at this price are better than those at lower prices as they are made with better materials or ingredients, last longer or picked at the best time for taste. Also, if a store handles a product with a short life — like fresh fish — a higher price may be charged to account for the life span. A store also can use this pricing strategy if it is on the front end of a new product rollout and gets it before other stores begin to carry it.
The final strategy is market parity, in which pricing is kept relatively the same throughout the market for the same product. With this strategy, the stores offer the same product with few differences in service, price or quality. This customer is not as price-sensitive as the EDLP shopper but is not usually prepared to pay for extras like service after the sale. The key to this pricing strategy is consistency in the marketplace among all the competitors. Once one competitor breaks rank, customers tend to gravitate toward that business.
Pricing is also controlled internally by two factors — ceiling and floor. The floor is where the business adds up all the costs related to the product and determines how much is needed just to cover those costs. The old adage that “You will make it up in volume” is not true, because once a business starts losing money on a product it rarely can buy enough to lower costs to make money at that price. This floor is typically the break-even point for the business.
The ceiling is the highest price the market can bear or that the customers will pay. A business owner following the high price, high value strategy needs to make sure the value being added to the product or service justifies the price, or sales will dwindle. A retailer can test pricing to find the ceiling but should always be aware of what is happening in the marketplace.
If a business owner would like more information on pricing strategies, your area Missouri SBDC can help answer questions, offers training and one-on-one appointments; reach out to a location near you.
The Missouri SBDC is funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.