THE THREE PRICING STRATEGIES FOR SMALL BUSINESS OWNERS

One of the questions that comes up in my counseling sessions most frequently 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.  These strategies are: every day low price (EDLP), high price high value and market parity.

The EDLP Method

EDLP is the strategy typically adopted by the big discount chains where 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. As a small business owner though, it is a hard one to maintain as the owner may develop a downward spiral on pricing and creating 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 used. It does not mean the business can’t temporarily do a sales event where they 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. A price sensitive shopper is the best target for this pricing strategy as they have the lowest expectations for service.

Higher Price, Higher Value Method

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 shopping, buying and using the purchased product. When compared to a big chain, the customer usually feels they are getting taken care of better, able to get answers to questions from knowledgeable employees who will take the time necessary or the 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 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, then a higher price may be charged to account for the lifespan. A store can also use this pricing strategy if they are on the front end of a new product roll out and get it before other stores begin to carry it.

 Same Market, Same Product, Same Price Method

The final strategy is market parity where pricing is held to relatively the same throughout the market for the same product.  With this strategy, the stores offer the same product with little 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 for this pricing strategy to exist is for there to be little difference in the marketplace between all the competitors. Once one competitor breaks rank, customers tend to gravitate towards that business.

The Floor

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 says “I have to have this much just to cover my costs.” The old adage “you will make it up in volume” is not true because once a business starts losing money on one product it rarely can buy enough to lower costs to make money at that price.  This floor is typically the breakeven point for the business.

The Ceiling

The ceiling is the highest price the market can bear or 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 the marketplace.

If a business owner would like more information on pricing strategies feel free to contact Richard Proffer at the University of Missouri Extension Center Small Business Technology Development Center in Jackson, MO.  He can be reached at 573-243-3581 or email at profferrd@missouri.edu.