Small Business Pricing – 5 Steps To Effective Price Management

Linda runs a sewing business that does works like alterations and hemming.  Unlike most small business owners, Linda writes a blog that is about “Sewing for profit” in which she shares her ideas and practices to help others like her to run an alterations business.

In the down economy when people postpone purchases, alterations should be good business. But the barriers to entry are low, there are many individuals and businesses offering this service and the market alters (pun intended) with the economy. There are also challenges in reaching the right customer segments. All these make this a highly competitive market with challenges in communicating differentiation and price list becomes the main piece of any messaging.

Linda is thinking about pricing and wrote about it recently. A very well written article that considers factors like opportunity cost of the business owner’s time, competitive analysis and a pricing model for someone starting new in this business. Linda recommends a pricing that is based on the time it takes the individual to do the work and based on pricing from other competitors in the area.

If I were to suggest changes, it is avoiding what Mr. James Mason described as the 8 deadly pricing sins and practicing what I described in Effective Price Management. Pricing a product or service based on what it takes to produce and deliver it is cost based pricing. The risk is that in any undifferentiated market there will always be someone willing to price it lower and quickly prices will spiral down.

What can a small business, like an alterations or any such business, can do to practice effective price management in a highly competitive environment? Here are five steps to get there:

  1. Recognize that cost to produce is not relevant to your customers. Your costs are relevant only to see if you can run a profitable business given the addresable market and prices you can charge.
  2. Recognize that price is not differentiation. Competing on price does not let you have a conversation about the value you add.
  3. Identify the different customer segments and the economic value to them from your service.In the case of alterations the segmentation is based on usage scenarios, sometimes a customer would want to get their work pants altered and other times their expensive evening wear. The economic value is different for each case. Practice a pricing model that is based on this value add.
  4. What is “ownable”? When many other competitors are in the same market, what sets you apart from the rest? Is that defensible and unique and no one else can claim the same? In other words is that “ownable”? Identify that and make the marketing conversations about this and not lower prices. On the last point, salons excel in offering multiple prices based for the same service based on who does the work.
  5. Offer multiple versions of your product/service, be it based on material that is worked on, raw materials you use, convenience or based on person who is doing the work in your business.