In small business management and marketing, few decisions have as large an impact on success as setting product prices. The prices business sets influence how many customers actually purchase products, the types of customers a business attracts and sales revenue. Business owners and marketing managers should consider several key factors when setting product prices to work toward their business goals.
Businesses have to sell more than they spend to make a profit and stay in business. If a product costs $10 to produce, setting a price of $5 is not financially viable, since the company takes a loss on each unit sold. Companies should consider the cost of producing a product as well as other operating expenses when considering product prices. The price of products should exceed production costs and leave enough money left over to pay for operating expenses like rent, insurance and taxes for a business to make money.
- Competing Products
In most markets, consumers have the choice of buying several similar products. The prices that competitors set for their products are an important consideration for small businesses that are introducing new products. If a company sets prices too far above competitors, consumers may shop elsewhere. Setting prices too low can also be dangerous as it could start a bidding war where competitors slash prices in an attempt to retain market share, resulting in lower profit margins for all companies in the industry.
- Consumer Demand
Small businesses often focus on innovating products that meet the needs of specific niche markets within larger markets. Marketing research, such as surveys were given to potential customers, can help business managers gauge the level of demand for new products and the amount that the average consumer is willing to pay for a new product. Consumers may be willing to pay a premium for new products with special features that fulfill needs that are not met by other products.
- Product Positioning
The prices a company sets influences the way consumers view the company and the quality of its products. When a company sets low prices, it is a signal to consumers that the company is a discount retailer that sells cheap products. Inexpensive products are often associated with low quality, regardless of the actual quality of the products. Companies that set high prices position themselves as upscale or luxury brands. Managers should consider the image they wish to promote their company and products when setting prices.