Conversation with a Small Business Owner on Pricing

There is so much knowledge and information that we all take for granted but is not available to most small businesses. Here is a snippet of conversation I had with  a person who is planning to start her own acupuncture clinic.

Q:How big do you think the market is?
A: What do you mean? I do not know. I work now in university clinic and I see 10-12 people a day. There are a lots of people out there. If I can get those 10-12 people to come see me in my clinic, I will be profitable.

Q: Why 10-12 people?
A: After rent and other things, that is what I need to live at the same level as my current job.

Q: How will you get 10-12 people a day?
A: The university clinic gets it, I think I can get it too.

Q: What kind of customers seek acupuncture?
A: I usually see people who have not found a cure with any other method. By the time they come to the clinic they are really sick.

Q: What do you think these customers can afford?
A: How can I tell? They seem worn down, that is why they come to university clinic.

Q: What will you charge for the service?
A: Price is not a decision for me. Everyone in this area charges $40. So I do not have to worry about coming up with my own. I will charge the same.

Q: Why is that?
A: When everyone is charging one price, the customer comes in with that price in their mind (she intuitively gets Reference price). So I cannot fight it. They are going to say, “you are new and why are you charging more”.

Q:Would you consider setting 3 different prices for slightly different types of services and see what your customers will pick? Just for a short time at least?
A: How can I charge different customers differently? That is not correct. If I am not spending more  time, effort or materials I cannot charge different prices. It makes no sense to tell customers I have $40, $50, $60 services, you pick which one you like.

Q:Why is it wrong to charge some customers more even if you do not have costs? You should set your price based on your customer not your costs.
A: Customers already know what to pay. I cannot charge lot more than my rent, time and materials.

That is one anecdote, take it for what it is worth.

Small Business – Big On Price Management

Effective Price Management – Nestle is doing it, P&G is doing it, Victoria Secret is doing it and these are definitely not small businesses. Now, smart small businesses, despite facing recession and decreasing customer demands, are adopting effective price management.  Here are two businesses featured in WSJ Insights Entrepreneur Roundtable and their pricing strategy and tactics:

Versioning: If one price is good, two prices are better. Versioning is about understanding that your customer segments and delivering them a version that adds value at a price point they are willing to pay and profitable to you. Bud Konheim, founder and CEO of Nicole Kim, says:

In July of 2007, I saw what was going on and I had a choice: lower the prices and compete that way, or go back to the philosophy that we have, which is design, design, design. You know, competing by price, the winner gets zero. We didn’t want to do that. But we are known for special-occasion dresses, so I introduced a new category called Daytime Dresses, which was a cover for making lower-price stuff. So I had two of these things going, a lower price and a higher price.

Using cost signals for price increases: This is a pricing tactic that helps address fairness concerns when a marketer wants to increase prices. Lida Orzeck, CEO of Hanky Panky Ltd, says

On June 1, 2004, we raised the price to $18; I think maybe it was $17 earlier. And then five years had passed and near the end of ’08, we had a plan to increase the price. We let everybody know and explained why—all of our prices have gone up, for materials, labor and so on.

Further reading:

  1. five steps to effective price management for small businesses,
  2. Price increases when demand shrinks
  3. Bottled water prices