Profitable Pricing: Transforming Numbers Into Art

As we embark on a new year with the change still fresh in our minds, it’s an opportune time for small business owners to evaluate their pricing strategies. Pricing tends to be a very scientific numbers game, and we think it is about covering our costs and making a profit. But I’m here to share my belief that you need to look at pricing as more of an art form backed by numbers on a spreadsheet that will ensure profitability. I want to challenge you to look at your pricing from a different angle and let go of the old belief that “no one is willing to pay that in my area.”

I hear that statement all the time when I am traveling and sharing my formula for a pricing strategy for profit. Small business owners tell me they live in a small town, and no one is willing to pay a certain amount. I hear that the competition up the street is ruining the market, or the Cricut mom is undercharging potential customers. Those are all valid situations that small business owners have to deal with, but the business owners miss the fact that someone in their town has a pair of name-brand shoes or a designer handbag, meaning that people are buying from people other than the competitor, and the Cricut mom only has so much reach. The reality is people are willing to pay what you need them to pay for the products and services you offer — you just have to change the perceived value.

In the years that I have been running Our Success Group, 80% of the responses we get to the question “What is the biggest challenge in your business?” is related to pricing. People dislike that part of being a business owner and see it as a necessary evil. Pricing is nuanced and can be fun, though it is often overshadowed by the fear of overcharging or losing out to competition. I’ve seen common misconceptions and oversimplifications about pricing throughout our industry. The truth is that pricing cannot be reduced to a mere multiplication of costs or emulating competitors. It’s an art that requires a deep understanding of your business’s unique value, costs, and market position.

One of the most frequent pricing errors is businesses that set their prices based solely on competitor prices. They go to Facebook or an online forum and ask questions like, “What should I charge for a sublimated mug?” But let’s say the average response comes back and the going rate for mugs is $5. Can you be certain that selling a mug for $5 is going to suit your business model? You have a unique cost structure, which includes overhead and future investments that you must consider. It’s vital to know your numbers intimately. This is not just what it costs to produce your product, but the overall cost of running your business, including paying yourself and planning for growth.

The other challenge I have seen people create for themselves when it comes to pricing is trying to beat the competition as their only strategy. Many folks who do this end up undercharging their customers, with lots and lots of work, and then can’t figure out why they are not successful. I recall a conversation with a business owner after a seminar who was in this exact spot. He was confident because he had all of this work to do, yet he was struggling with profitability. He asked me what he could do to increase his profits, and he was clearly looking for me to give him some cost-reducing gold nuggets.

My answer to him was “Go raise your prices by 50%.” He was flabbergasted and clearly upset with me. After collecting himself, he said, “If I raise my prices by 50%, I’m going to lose half my customers.” I left that comment sitting with him for a second to see if he would see it. Finally, I said, “Sounds like a great plan to me. Make the same money doing half the work.”

Ultimately, we have to set pricing based on our unique business costs, the value we provide, and who our ideal customers are. However, most companies set their pricing based on external signals because there is some effort required to master the art of pricing. You must start by understanding your costs at a deep level. What does it cost you just to be in business each day? Then you must clearly define your unique value proposition. What makes you different from the competition up the street or a better choice than the neighbor Cricut mom. And finally, you need to be clear on why your ideal customers buy from you. What problem do you solve for them?

The key to successful pricing lies in aligning with the perceived value your product or service holds for your ideal customer. It’s essential to understand why customers choose you. Is it for the quality, uniqueness, or some other reason? Your pricing should reflect this perceived value, not just the cost of production. Remember, customers don’t just buy a product; they buy the experience, the brand, and the solution it provides.

To elevate the perceived value, consider strategies like product bundling, which simplifies purchasing decisions for customers, or implementing direct pricing without hidden fees to build trust. Remember, small changes in presentation can significantly impact customer perception. For instance, referring to a fee as “small” can reduce the psychological burden of additional costs.

It’s time for a paradigm shift in how we approach pricing. Rather than engaging in a race to the bottom by undercutting competitors, focus on understanding your costs and setting prices that ensure profitability based on your unique business. As I said, there is effort required, but once you have a firm understanding of your costs, your unique value proposition, and why your customers buy from you, pricing becomes an art form.

In fact, for many businesses that build this foundation, pricing becomes more of an afterthought. Their customers love doing business with them so much that they ask for the product or service and then ask how much.

Rethinking your pricing strategy is not just a yearly exercise but a continuous process that requires understanding your business’s unique value and customers’ perceived value. I challenge you to evaluate at a deeper level why your customers buy from you and then you can update your prices. Then you will be ready to price solely based on the value your ideal customers are happy to exchange, and it is a value your bottom line is delighted to receive to make it grow. Your ideal customer and your business are unique to you only! GP