Small businesses have always faced tough challenges. Limited resources and fierce competition from bigger companies pose significant hurdles for small business growth.
According to research from NYU, small businesses generally operate with net profit margins lower than 9%.
Achieving these margins in fluctuating business environments is challenging, to say the least. A good pricing strategy is central to achieving this goal.
The right prices can increase customer loyalty, attract buyers away from your competitors, and reduce cash flow burden.
Here are some important pricing questions every small business owner must consider.
Is Subscription Pricing A Good Fit?
Subscriptions have existed in one form or another in the small business world, much before SaaS made them popular.
Landscaping and home maintenance businesses typically charge their customers a monthly fee.
Dollar Shave Club’s cheap razors captured mainstream consciousness when founded in 2011. That company’s business model revolved around recurring subscriptions too.
There’s a lot to like about subscriptions. They help you maximize recurring revenue and remove the need to constantly chase new customers.
Since customers subscribe to a product, companies have more chances to interact with them and build loyalty over time through discounts and value-add cross-sells.
However, subscriptions don’t suit every product or service out there. For instance, a company offering office furniture might not do well to operate with just a subscription retainer model.
While some clients might have repeat orders, most will probably need desks as a one-off order.
Forcing those one-off clients to sign up for a retainer will likely turn them away, losing the business valuable one-time revenue. You must analyze their services to figure out if subscriptions make sense.
If you aren’t sure whether subscriptions make sense to your community of buyers, consider piloting this approach with a small set of customers to see how it works.
If the pilot group reacts positively to subscriptions, expanding the strategy will likely work. Companies can even experiment with a hybrid model where some services are subscription-based while others are one-offs.
Can You Penetrate The Market With Low Prices?
Amazon built its business by spending money on advertising and undercutting competitors with low prices.
With this strategy, once a company establishes a majority market share, it dictates prices that competitors have to match. Walmart is another company that expanded this way and established economies of scale.
While expecting your small business to expand like these two companies might be unrealistic, the market penetration strategy isn’t a write-off.
If your small business operates in a small niche, ask yourself if you could expand market share by bearing a few months or quarters’ negative cash flow.
If you capture the majority of your small market at the end of that period, you can dictate prices to a reasonable extent and recover profits through higher net margins.
Reduced competition will also guarantee recurring business in the long run with fewer dollars used for marketing and sales.
However, the short-term cash flow pain might be too much to bear for the average small business.
Small businesses also have loyal customers, and a company seeking to undercut its competition might invite some negative backlash.
In this age of online reviews, your business might be unable to withstand such pressure.
Despite these risks, evaluate whether you can replicate Walmart and Amazon’s strategies. If your niche is especially small, you might be able to risk such a move.
Will Premium Tiers Work?
Premium or tiered pricing is an offshoot of subscription pricing models. A company offers different service packages for different prices or tiers.
Tiers help companies appeal to prospects with different budgets, increasing the overall market share.
Tiered pricing helps small businesses immensely. Even if sold as one-time offers, tiers help you create multiple brand identities under a single umbrella.
For instance, you can appeal to cost-conscious people with low prices, and appeal to people with more discretionary income with a luxury tier.
As with subscription pricing, the key is to verify whether your product/service fits this strategy. For instance, if you’re running a hairdressing salon, you might offer home-visit services.
However, people are willing to only pay so much for a haircut. You can market your home-visit service as a luxury option as much as you want, but you’ll still have to charge people below a threshold for it to be viable.
Marketing plays a big role in tiered pricing, since you must convince people the higher tier is worth the additional cost. This increases your costs, so make sure your margins make sense when creating new tiers.
Can You Price Match?
Price matching is another big business move that small businesses can effectively replicate.
As with undercutting the competition with low prices, you must figure out the impact on your margins before implementing it. In a small business context, much depends on the state of your competition.
If you’re the smallest among your competitors, this strategy will bankrupt you quickly. To avoid getting squeezed, you’ll have to occupy one of the leading spots in your market.
Even then, you might not have enough of an advantage to put pressure on your competitors.
Price matching ultimately aims at capturing more market share while operating at lower prices over the long term.
If your competitors can maintain profitability at lower prices and you can’t take enough market share away from them, price matching will only reduce your profits.
Remember that you must allocate an additional marketing budget to make sure your price match campaign is a success.
Fail to do this, and your customers will remain unaware of your pricing strategy, failing to give you a greater market share.
An Optimized Pricing Strategy Is Critical
Small businesses can surmount several challenges with a robust pricing strategy. The considerations mentioned above are critical ones that every small business owner would be wise to keep in mind when running their business.
Fail to address these, and you might find yourself with low margins and an unsustainable business model.