Product Pricing Strategies for Small Businesses

Are you a small business owner? Do you have problems with how to price your products? Here are a few pricing strategies that you can use to help your business.

Before we can go into discussing the different pricing strategies, we must now the cost associated with each product. The 2 key elements in determining your product cost are cost of goods and operating expense. The cost of goods includes all amount paid for the product including shipping and handling expenses. While operating expenses include all costs associated with operating a small business. This usually includes overhead expense, payroll, marketing expense and office supplies.

Regardless of what pricing strategy you use, the first and most important rule to remember in pricing your product is to set a price that exceeds your product cost. I know this is common sense but I'm putting it here for reference anyway. A small business owner simply cannot succeed in business if they continue to sell below product cost.

Pricing Strategies:

1. Mark Up Pricing

Mark Up pricing is setting a preset profit margin or percentage (usually the industry standard) to the cost of the merchandise. Like for example, if you want a 50% profit margin and your product cost is 50 bucks. You would set your product price at 75 (50 + 50*25%).

2. Vendor Pricing

Vendor pricing is using the Manufacturer's Suggested Retail Price (MSRP) as your product price. It is a common strategy used by small business owners to avoid price wars and still maintain a decent profit. However, by using the MSRP, you lose your advantage, in terms of product price, over the competition. You will have to think of something else to attract customers to buy your product.

3. Competitive Pricing

There are two ways for a business owner to engage in competitive pricing. The most common way is to price your product below that of the competition. Another way is to engage in Prestige pricing, or pricing your product above that of competition. Prestige pricing can be considered when your location, exclusivity, or unique customer service can justify the higher prices.

4. Psychological Pricing

Psychological pricing involves setting prices to a certain level that is perceived to be fair by the customer. The most common method is odd-pricing. In this strategy, business owners use prices that end in 5, 7, or 9. Studies have shown that customers tend to round down a price of 19.95 to 19 rather than 20.

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