Guesswork just will not cut it in optimizing your product prices as a small business. Instead, you need to use a strategic approach to nail down the prices for all your products, allowing you to improve the customer experience and maximize your profit potential. Although it does take a considerable amount of research to find the optimal price points, your efforts can pay off for years to come. To streamline this process, you can follow these steps in establishing pricing optimization.
Determine Your Baseline Price Point for Each Product
Establishing a baseline price point can help guide your efforts in this process. Before you can determine what to sell your products for, however, you have to pinpoint their actual cost. That way, you can set a price point that covers those costs and brings in a profit.
You will want to start by tallying up the cost of creating the product and getting it to you, including:
Add up those figures, then divide the result by the number of products in each shipment. Then, add a percentage, depending on your profit expectations, to establish a baseline price point for each product in your lineup.
Take a Look at Your Operating Expenses
Once you have an idea of what your products cost your company, you will need to look at what it takes to run your company and offer those items to your customers. Otherwise, your efforts are all for nothing if you cannot keep your business afloat and promote growth in the coming years.
Use a spreadsheet to put a number on all your operating expenses, such as:
If you used loans to start up your business, you can also add in debt service costs. Then, add up everything to see just what you need to make each year to keep your small business running strong for years to come.
Use Estimated Sales Figures to Verify Pricing
You will need to verify that your product pricing will cover all your operating expenses, or you could end up in the red in the coming year. To do so, you will need to estimate your total sales numbers for the year using data from prior years if available.
Using modest sales expectations figures, multiply your product cost by expected sales to see how much money will be coming in. Then, compare it to your operating costs to see if you will cover all your expenses and even turn a profit. If not, you will need to adjust your product pricing or maximize your marketing efforts to generate enough revenues for the continued success of your business.
Perform a Competitor Analysis
You will need to compare your baseline product price points with your competitors’ pricing to see if you are within an ideal range. To start, look at the pricing of your top three competitors that offer similar products and service levels as your brand.
If your main competitors are undercutting your prices, you either need to meet their price points or provide additional value to your customers. You can provide additional value by offering:
The reputation of your brand can also help add value to your products, making it more likely your customers will pay extra for peace of mind. If your brand is known for its generous replacement policy, for example, customers will skip lower-cost items from your competitors in favor of your offerings.
Determine When to Raise Prices
Once you finalize the pricing on all your products, you will need to determine just when to raise prices to keep up with the market. Although you cannot see into the future, you can decide which factors will trigger a price review, setting the stage for smart increases later on.
Factors you can look at include:
If you notice any of these changes, you know it is time to revisit the pricing optimization process for one or all of your products. Take the time to look at what is working to determine if it is worth rocking the boat.
You may notice things that are not working during that step, giving you an idea of what to change to painlessly boost revenues. If you find that any of your products are causing you to lose money, you will need to address that issue right away before making any other pricing changes. Only make a single change at a time and evaluate the results to stay on top of your performance in this realm.
As you move through these steps, do not worry about the hours ticking by. Most small businesses spend up to 10 hours per year setting up and optimizing their pricing strategy on average, and that is often not even enough. So, take as much time as you need to set your ideal price point for each product, as it is likely to pay off big time in the coming years. Working with your accountant or business advisor on these issues can be extremely helpful as well.
Spencer Wilson writes for CountingWorks, an accounting news and advice website. Reach him at [email protected].
About Spencer Wilson, EA
Spencer Wilson Financial Management Services has been a family business for the last 40 years. He specializes in personal and business tax preparation and tax planning, as well as accounting and payroll services. Based in Long Beach, they serve the greater Los Angeles and Orange County areas.
