The importance of properly setting prices for small business owners

Why is it important to properly determine the price of a product for the survival of a small business

Incorrectly created pricing can have negative consequences; It's important to strike a balance between the value invested in the product and the perceived value by customers...

  • Wholesale and Retail August 2022
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Many small business owners need to charge more adequately for their products or services, which can significantly impact their business's success. Setting the price for one's product or services may seem like a straightforward part of running a small business, but such an approach can quickly lead to pitfalls with negative consequences for the business's results.

Setting the price for your product is vital for the development and survival of small businesses. Smartly created pricing for products and services will result in a stable and continuous business in the long run. Conversely, incorrectly priced products negatively affect every aspect of business.

Incorrect pricing can be wrong in both directions; overpricing and underpricing small business products can have adverse effects, primarily on their short-term finances and, if not addressed promptly, on the survival of their business.

It is clear that, as in everything in life, in creating the price of a product, balance is needed – a balance between the value that the entrepreneur has invested in their development and the value/emotion that the customer gets from buying that product, a balance between the desire of the entrepreneur to make as much profit as possible and the purchasing power of customers, a balance between one's price and the price of the competition.

When solving this equation of "balance," it is essential for the entrepreneur to analyze their competition and their prices. It is also important to identify the target group of customers and to know whether you are addressing a group of customers willing to pay a "higher" price for a product that brings them value or if it's a group of "budget customers" who are price-oriented. Focusing your offer on budget customers may make it easier to make sales. Still, it has a trap in that a small business cannot quickly adapt to downward price changes in the market as prominent players can, which will inevitably lead to a decrease in sales.

Small business owners need to know that the target customer should see the value in their product and be willing to pay that price. Therefore, it is good to include a questionnaire in the analysis of potential customers, which will determine the preferences of different groups of customers.

One of the most critical aspects of this survey is how much customers would be willing to pay for a particular product. This price is referred to as the upper price limit and helps the entrepreneur identify the price range within which they can operate. Often, through the survey, it will be revealed that the product with the highest price currently available on the market does not represent the actual upper price, and customers in the survey may indicate that they are willing to pay even more than the maximum price of that product on the market.

During the survey, asking potential customers what value they see in a particular product will be extremely useful. This feedback will be invaluable in creating a pricing strategy and market positioning.

After collecting enough information about the competition and customer preferences for a product, there is a greater chance that the entrepreneur will choose a pricing strategy to bring them stable and continuous business. The choice of pricing strategy will also depend on the product's availability to the customer, i.e., how difficult it is for the customer to find a particular product. If the market is flooded with a product, you will likely need to determine the maximum market price and position your product below it. In addition to availability, the entrepreneur's costs for product investment will also affect the pricing strategy. When calculating the production costs of their product, small business owners should consider not only direct costs but also less obvious costs such as storage, transportation, order preparation costs, or marketing. If these costs are omitted from the equation, they will reduce the entrepreneur's projected profit.

Considering all costs, a budget can be created for a specific product. This approach helps to see beyond the short term and to think about how the pricing strategy will play out in the coming years.

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