Introducing a new product or service is one of the best strategic approaches to growing a small business. It’s a way to hold the interest of your existing customer base while reaching out to new audience segments that may now be interested in what you have to offer.
Although you may think the most challenging aspect to adding a product or service is to do something unique that stands out in the market, even more difficult is often setting the price for that introduction. Price it too low and you leave profits on the table; set it too high and you may lose sales and customers.
However, you can implement a pricing strategy that appeals to your audience while maximizing the bottom line.
Let Go of the Lowest Price in the Market Mentality
Before you work on any pricing plan, it’s important to get past any misconceptions you have that may be mentally blocking you from pricing your product or service correctly. Being the cheapest in your product or service category is not necessarily the answer. That’s because many audience members veer away from the cheapest, attaching a lack of quality and service to the low price point. When those customers do conclude that before buying, you’ve already lost them.
Know What You’re Up Against
Start with what’s already on the market from your competition, including any product or service that is similar. Find out what the competition charges and what features they offer that are comparable. It doesn’t mean you should automatically make your price lower.
Instead, knowing what you’re up against and what others are paying for provides a ballpark figure that could be the same -- if not, higher -- than the competition, especially if you have additional features.
Test and Assess Interest
User testing is a must because it gauges the level of interest and demand for the product or service. This also provides a way to collect feedback on what they would pay in order to have this type of product or service and why. When gathering this information, also get their ceiling price, which is the highest price they would be willing to pay.
Alternatively, you can conduct split testing where you display different prices for users and see how many of each price point the users will select. In also segmenting the users, you’ll get a better understanding of how certain groups of customers will purchase.
Consider Tiered Pricing
If you notice that specific segments are opting for certain price points during the testing phase, this may be an indication that a tiered pricing strategy may be part of the approach. This is especially true of a new service where you can split the features into different levels with accompanying prices. You’ll be able to capture customer interest across multiple segments, while appealing to their needs and budget.
Measure for Profit Margin
Among the factors you consider when setting the price or tiers is the need to reach a point where the margins cover -- and even exceed -- the expenses involved with making and selling the product or delivering the service. Although some thought must go into whether processes involving that product or service can be improved to reduce the overall cost, the profit margin is integral to the overall pricing structure.
That means looking at some very specific costs, such as materials, labor, and overhead. Marketing and sales campaigns must also be factored into the equation to determine your break-even point and potential profit margin.
Emphasize Differentiating Attributes and Value
Rather than stepping into a price war with your competition, selecting your product or service price should focus on how to enhance the exclusivity of what you offer through differentiating attributes, valuable features that customers most need, and brand image and the values associated with that image.
Often, small business owners underprice themselves out of fear of not attracting enough customers. That’s when profits are left behind. This calls for another change in mindset.
Think about the other factors mentioned above and the approximate price range that those factors suggested. Then, aim slightly higher than that on the final price. To get to that mindset, focus on what sets you apart than the rest, including knowledge, quality, skill, service, and the overall experience. When you see that worth, it will justify why you are aiming higher on the price point.
Also, it’s important to remember that it’s easier to start with a higher price and gradually lower it through promotions and sales than it is to do the opposite. This gives you breathing room to make adjustments after going to market, while also providing you with that aforementioned profit margin.