Make Sure the Price is Right with Market Research

One way to help ensure that the new year is a profitable one is to re-evaluate your company’s pricing strategy. You need to devise an approach that considers more than just what it cost you to produce a product or deliver a service; it also must factor in what customers want and value — and how much money they’re willing to spend. Then you need to evaluate how competitors price and position their offerings.

Doing your homework

Optimal pricing decisions don’t occur in a vacuum; they require market research. Examples of economical ways smaller businesses can research their customers and competitors include:

  • Conducting informal focus groups with top customers,
  • Sending online surveys to prospective, existing and defecting customers,
  • Monitoring social media reviews, and
  • Sending free trials in exchange for customer feedback.

It’s also smart to investigate your competitors’ pricing strategies using ethical means. For example, the owner of a restaurant might eat a meal at each of her local competitors to evaluate the menu, decor and service. Or a manufacturer might visit competitors’ websites and purchase comparable products to evaluate quality, timeliness and customer service.

Charging a premium

Remember, low-cost pricing isn’t the only way to compete — in fact, it can be disastrous for small players in an industry dominated by large conglomerates. Your business can charge higher prices than competitors do if customers think your products and services offer enhanced value.

Suppose you survey customers and discover that they associate your brand with high quality and superior features. If your target market is more image conscious than budget conscious, you can set a premium price to differentiate your offerings. You’ll probably sell fewer units than your low-cost competitors but earn a higher margin on each unit sold. Premium prices also work for novel or exclusive products that are currently available from few competitors — or, if customers are drawn to the reputation, unique skills or charisma that specific owners or employees possess.

Going in low

Sometimes setting a low price, at least temporarily, does make sense. It can drive competitors out of the market and build your market share — or help you survive adverse market conditions. Being a low-cost leader enables your business to capture market share and possibly lower costs through economies of scale. But you’ll earn a lower margin on each unit sold.

Another approach is to discount some loss leader products to draw in buyers and establish brand loyalty in the hope that customers will subsequently buy complementary products and services at higher margins. You also may decide to offer discounts when seasonal demand is low or when you want to get rid of less popular models to lower inventory carrying costs.

Evolving over time

Do your prices really reflect customer demand and market conditions? Pricing shouldn’t be static — it should evolve with your business and its industry. Whether you’re pricing a new product or service for the first time or reviewing your existing pricing strategy, we can help you analyze the pertinent factors and make an optimal decision.

How Competitive Is Your Business?

Every business owner launches his or her company wanting to be successful. But once you get out there, it usually becomes apparent that you’re not alone. To reach any level of success, you’ve got to be competitive with other similar businesses in your market.

When strategically planning, one important question to regularly ask is: Just how competitive are we anyway? Objectively making this determination entails scrutinizing key factors that affect profitability, including:

Industry environment. Determine whether there are any threats facing your industry that could affect your business’s ability to operate. This could be anything from extreme weather to a product or service that customers might use less should the economy sour or buying trends significantly change.

Tangible and intangible resources. Competitiveness can hinge on the resources to which a business has access and how it deploys them to earn a profit. What types of tangible — and intangible — resources does your business have at its disposal? Are you in danger of being cut off or limited from any of them?

For example, do you own state-of-the-art technology that allows you to produce superior products or offer premium services more quickly and cheaply than competitors? Assess how suddenly this technology could become outdated — or whether it already has.

Strength of leadership team. As the owner of the business, you may naturally and rightly assume that its management is in good shape. But be open to an objective examination of its strengths and weaknesses.

For instance, maybe you’ve had some contentious interactions with employees as of late. Ask your managers whether underlying tensions exist and, if so, how you might improve morale going forward. There’s probably no greater danger to competitiveness than a disgruntled workforce.

Relationships with suppliers, customers, and regulators. For most businesses to function competitively, they must rely on suppliers and nurture strong relationships with customers. In addition, if your company is subject to regulatory oversight, it has to cooperate with local, state and federal officials.

Discuss with your management team the steps the business is currently taking to measure and manage the state of its relationships with each of these groups. Have you been paying suppliers on time? Are you getting positive customer feedback (directly or online)? Are you in compliance with applicable laws and regulations — and are there any new ones to worry about?

Loss of competitiveness can often sneak up on companies. One minute you’re operating in the same stable market you’ve been in for years, and the next minute a disruptor comes along and upends everything. Contact us for more information and other profit-building ideas.