Making the Right Pricing Decisions

Making pricing decisions is always tough – and even more so when the economy if slow and sales are slipping. It’s tempting to cut prices hoping to generate higher sales volume. Sometimes cutting prices just produces lower margins on a low volume.

For example, you may be asking yourself; what you should do if you’re being squeezed by cost increases? Can you increase prices in a slow economy? How do you respond if your customers complain? Can you justify holding prices steady if your competitors cut their prices? There are no easy answers, but running through a three-step process can help you make the right decision.

* Know your strengths.  How does your product or product range stack up against the competition? Are your products higher quality, lower quality, or indistinguishable from your competitors’ products? Do you have an edge that can justify higher prices?

How about all the other elements that make up your total service package? Do you provide a bigger inventory, faster delivery, better payment terms, wider product line, and better service on returned items? If not, can you change your operations to gain an edge in any of these areas? Ask your employees for feedback on these questions.

* Put yourself in your customers’ shoes. Try to understand your customers’ needs. Are your small business customers under profit pressure? What changes are occurring in their industry? How can you adjust your products or service to add value for them – value that they might be willing to pay for? What are their alternatives if you raise prices? If your salespeople are staying in touch with their customers, they should already have the answers to many of these questions.

* Know your competition. Apply the same questions you asked about yourself to your competitors. What are their strengths and weaknesses? What can they offer your customers that you can’t? How will they respond if you change prices? Here again, your sales staff should have good information on the competition they face.

When you’ve worked through these three steps you should have a much better idea of the competitive effect of a price change. Run some profit scenarios and then review your pricing decision with your salespeople. Make sure they understand the rationale, and review how they’ll present the change to customers.

If you would like further assistance in keeping your business competitive contact our office at (260) 497-9761 to schedule an appointment with our advisors.