It doesn’t matter if your business sells products or services, setting your prices is the most elemental factor for your success. Go low and you lose money with every sale, but shoot too high and you’ve priced yourself out of the market.
Over the past two decades, my husband and I have launched several businesses. During this time, we have made a few mistakes, fixed those mistakes and learned several important product and service pricing lessons when it comes to pricing strategies for the small business.
1. Price Isn’t Everything
Many young companies feel the pressure to heavily discount their prices in order to win business. When we launched our online legal document filing company in 2009, the market was already filled with big names like Legal Zoom, along with numerous small players who were practically offering their services for free. In a rush to attract customers, we positioned our products as low as possible. Sales were great, the only problem was our prices were making the business unsustainable.
We quickly realized we needed to change our approach from selling the cheapest service around to bringing added value to our customers. In doing so, we increased our prices. Nervous about any drop off in sales, we were surprised to see that our sales volume actually increased by 9% the first month after the price raise and by 22% the following month.
The New York Times ran a story about an online retailer, Headsets.com. The company experienced a computer error that caused all the prices on their website to be displayed at cost rather than retail. With the dramatically lower costs, they expected their sales to soar. Instead, the increase was only marginal.
The moral of the story is don’t assume that customers are only looking for the lowest price. Yes, the price tag is a big part of the buying decision, but your sales may be less dependent on price than you think.
2. Think Beyond Commodities
When any product or service becomes commoditized, the lowest price always wins. At first glance, the online legal service industry seems as commoditized as they come. As providers, we all help our customers incorporate their businesses or file other legal forms with the state.
When we chose to raise our prices, we decided to focus on our main area of differentiation: Customer service. Each call is answered in just a few rings by a small business startup expert working in our California office. We started to offer free business consults and rolled out other free value-add services. With slightly higher prices, we were in a better position to provide this level of customer service to our customers.
The bottom line is you can always find a way to differentiate yourself from the competition, even if you think you’re operating in a “lowest-price-wins” commodity market. I’ve learned that you are better off in the long run focusing on how to bring more value to customers, rather than simply slashing your prices.
3. Offer Tiered Pricing
Like so many online industries, we face constant pressure from low-cost providers offering bare bone services. To combat this pressure, we implemented a tiered pricing structure that lays out multiple options at different price points. Tiered pricing gives potential customers more options to meet their needs, but most importantly, it empowers customers to make better, more informed decisions about what they get for their money. When you see each package side by side, it makes the price points feel less arbitrary.
Regardless of your industry, service, or product, you can probably think of a way to give your customers options. For many of our services, we created three packages: basic, deluxe, and complete. Three tiers work best, since the structure fits a familiar framework: bronze, silver, gold; small, medium, large; good, better, best.
Since implementing our tiered pricing, the majority of customers opt for the top two tiers…demonstrating that consumers are willing to pay a premium, as long as they understand the added value of that service.
4. Make the Purchase as Easy as Possible
When it comes to sales, the main goal is to remove the barriers your customers may be facing when making their purchases. For us, this meant making the application process as easy as possible. For example, when a new business owner wants to incorporate, other sites will force them to fill out more than 20 pages. We worked hard to whittle the process down to just a single page.
To succeed in any form of eCommerce, you need to make the whole purchasing process as fast and hassle-free as possible. In our case, this meant eliminating the need to enter lots of unnecessary information. In other cases, this could mean not requiring users to open an account in order to make a purchase. Amazon’s one-click is a brilliantly successful way to eliminate any friction in the purchase transaction.
Related reading: Pricing Strategies for a Strong Bottom Line
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