08/ 01/ 2004
by Karen M. Kroll
A book light for $25 or $35? While that’s about twice what most book lights go for, LightWedge customers willingly shell out the extra cash for the higher-quality product. In fact, the Nantucket, Mass.-based business has sold hundreds of thousands of the lights, says Jamey Bennett, chief executive officer with the three-person firm. “We purposely designed the product not to compete in the throw-away $14.95 book light market.”
As Bennett’s experience shows, finding the pricing sweet spot requires more than simply adding up costs and tacking a profit margin on top. You need to understand your costs, your market and the value you bring to your customers.
Getting this right is critical, as your pricing strategy has a significant impact on your profit margin. Too high, and you’re likely to lose business. Too low, and you lose money.
“It’s like a forward pass in football,” says John Daly, president of management consultant firm Executive Education Inc. “Three things can happen, and two are bad.”
SeaSpace Corporation in Poway, Calif., calls on the insight of managers across all functions when developing price quotes, says Bruce Waddell, president of the 45-employee company that develops satellite ground stations containing weather and environmental information. Most projects are custom or semi-custom projects, which makes pricing even trickier.
“The experience and knowledge of virtually every function in the business is relevant to satisfying the customer’s requirements,” he says.
I Object
For most small-business owners, price objections are part of the game. Rather than focus on price, let prospects know the value of the goods or services you offer.
At times, potential clients for Joan Runnheim’s resume preparation service question her price. “I mention that I’m up-to-date on current resume trends and styles, and I’ll talk about the other services I provide, like career counseling,” says Runnheim, owner of Pathway Career Success Strategies in Hudson, Wis.
Raising prices brings another potential sticky situation. But the key to handling price increases is managing customers’ expectations, says Waddell of SeaSpace.
“Giving customers advance warning also helps,” says Bennett of Lightwedge. When Bennett decided to raise his wholesale prices earlier this year, he sent customers a letter alerting them to the coming increase, so they could place an order at the lower price. While it’s too early to tell the long-term impact, the notice “resulted in a nice flurry of orders,” he says.
And for customers who simply refuse to pay a reasonable price, it often makes sense to walk away from their business. “Small-business owners that don’t have the discipline to stand firm, sell and differentiate their product are the ones that get into trouble,” says Waddell.
Web Extras: To learn more, visit the "Pricing" section in the "Sales and Marketing" category of the Business Toolbox at www.NFIB.com/toolsandtips.
