Overcoming Pricing Challenges For Small Business Owners ⌛

So many small business owners face challenges regarding pricing because they think a one-size-fits-all pricing proposition is good enough in the early stages when it’s not. We understand that setting up a business is full of challenges. It needs a huge amount of willpower, patience, time and effort. If you are a small and medium-sized business owner who wants the best pricing strategy for small businesses, you want to gain a detailed understanding of what your customers value about your products or services, before you set prices. Thus, if you want to learn more about the topic, read on.

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In addition, you will also gain knowledge on how not to undercharge or overcharge your customers. Furthermore, you will discover how to price your new products and of course, you will know the best pricing strategy for SMEs. A value-based approach to pricing is the basis of a robust pricing proposition that’ll help you generate significantly more revenue at higher margins. While slaughtering the competition in the process.

What are the most common challenges for small business owners?

To begin, it’s important to delve into the prevalent obstacles that confront small business owners. These challenges often arise due to factors such as limited resources, intense competition, and evolving market trends, all of which can pose significant hurdles to the growth and sustainability of small businesses.

Challenges for small business owners #1: Limited Capital

Small businesses often grapple with the challenge of limited capital resources. This limitation arises due to a variety of factors, including a lack of access to external funding sources such as loans or venture capital. Without adequate capital, these businesses may struggle to invest in crucial growth opportunities. For instance, a small tech startup might find it challenging to develop a new software product or expand its operations without sufficient funds. To address this challenge, small business owners may need to explore alternative funding options, such as seeking angel investors or considering crowdfunding campaigns.

Challenges for small business owners #2: Market Competition

Intense competition within a specific market niche is a common challenge for small businesses. This competition can arise from established players or an influx of new entrants. To stand out in a crowded marketplace, small business owners need to differentiate their products or services effectively. For example, a boutique clothing store may face competition from both larger retail chains and other boutique shops. To overcome this challenge, the store might focus on offering unique, locally sourced clothing items that cater to a specific target audience.

Challenges for small business owners #3: Resource Constraints

Small businesses often contend with resource constraints, particularly in terms of human resources. This constraint can lead to overworked employees who must handle multiple roles within the company. The reluctance to hire additional staff may stem from concerns about budget limitations. To mitigate this challenge, small business owners should carefully assess workload distribution, consider outsourcing certain tasks, and weigh the benefits of hiring new employees against potential cost savings.

Challenges for small business owners #4: Adapting to Market Trends

Staying abreast of rapidly changing market trends is crucial for small businesses. Failure to adapt to evolving consumer preferences, technological advancements, or industry shifts can result in missed opportunities. For example, an e-commerce store that neglects to update its website design to be mobile-responsive may lose customers who prefer shopping on smartphones and tablets. To address this challenge, small business owners should invest in ongoing market research, attend industry events, and maintain a flexible business strategy that allows for quick adjustments in response to changing trends.

Challenges for small business owners #5: Pricing Problems

Pricing issues can be a significant hurdle for small businesses. These problems may arise from a lack of understanding of market dynamics, underestimating production costs, or misjudging the perceived value of their products or services. Setting prices too low can lead to unsustainable profit margins, while pricing products too high may deter potential customers. To tackle this challenge, small business owners should conduct thorough pricing analyses, consider competitor pricing strategies, and gather customer feedback to align their pricing with market expectations while maintaining profitability.

By addressing these common challenges with strategic planning, resource management, and a focus on customer needs, small business owners can enhance their chances of success in today’s competitive business landscape.

Overcoming Pricing Problems and Other Challenges For Small Business Owners 

It is common for SMEs to undercharge a product or service when they think their product or service is of low value to the customer or commonplace in the market. They feel their only option is to compete on price and not test their assumptions on value with their actual customers.

This type of pricing position is not the best pricing strategy for small business owners. They miss out on revenue opportunities and worse still hand over hard-earned margins to their competitors.

Conversely, it is also common for SMEs to overcharge for products or services when a product or service is novel, new or of high value to their customers. This is called a skimming strategy and not a bad approach to take if the product or service is completely new in the market, rather than being a new version of an existing product – a big difference.

Here’s why…

When a product is new, customers perceive it as a risky purchase. They think it may not perform as expected… They think it could be faulty… they think it could create a stir with their friends and network.

A skimming strategy can be the best pricing strategy for small business owners when a product or service is completely new or novel (like software as a service). The riskiness of the new product or service is likely to overwhelm customers’ concerns about price. Customers are also more likely to buy a new or novel service based on its value to them. They’ll be more likely to examine value before price, which is always the best pricing strategy for small business owners.

Also, for the small group of customers who are early adopters and like innovations, the excitement of the product’s new capabilities means they are less sensitive to price (i.e., think the iPhone launched 5 years ago).

Tips for overcoming SME challenges and working out your pricing proposition as a small or medium-sized business owner.

One of the best price risk management strategies for small business owners is a value-based pricing strategy.

Value Culture highly recommends that small business owners take a phased approach to building their pricing proposition:

• Obviously, understand your costs. However, do not base a markup on fixed and variable costs, just variable costs (i.e., cost of goods sold). Why? Because, if you use both, you will inevitably price yourself out of the market and your competitors will gain market share.
• Look at what competitors are doing. Examine market dynamics like seasonality, price cycles, quote to book or conversion; and price realisation. This is a good way to get a reference point on pricing in the market. But it’s not exhaustive. You then have to understand your customers.
• Then, gain a detailed understanding of customer value drivers – i.e., how they value your products. Turn that understanding into quantified estimates of their willingness to pay for your products or services. This is called customer value driver analysis.

A value-based approach to pricing analysis is the best pricing strategy for small business owners.

A value-based pricing proposition will help you make informed price changes without losing hard-earned revenue or volume. As you go through this process, many of you will find that you have either been unwittingly overcharging your customers. You may also find that you’ve been selling yourself short. This process will help find new revenue opportunities to regain control of your pricing.

Implications Of Solutions To The Challenges For Small Business Owners

Though customers are price-sensitive, they’re more likely to buy a product or service that has value to them. They examine value first before price.

A good way to get a reference point on pricing, SMEs should look at what competitors are doing. They should study market dynamics like seasonality, price cycles, conversion, etc.

SMEs should do a customer value driver analysis. They should have a detailed understanding of how customers value a product or service. Then turn that understanding into quantified estimates of the customer’s willingness to pay for a product or service.

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Bottom Line

Setting up a business is full of challenges. It requires an extensive amount of determination, patience, time and effort.

It is common knowledge that when a product is new, customers perceive it as a risky purchase. Customers think that it may not perform as expected, it may be faulty or maybe it could create a stir with their friends and network. We learned that the skimming strategy is best used when the product or service is completely new in the market.

Customers who belong to the small group of early adopters who like innovations are less sensitive to price. Their excitement comes from the product’s capabilities and not the price (just think of the iPhone, there are people who buy it though it’s pricey).

The best pricing strategy for small and medium-sized enterprises is a value-based pricing strategy.

See our blog here for the best implementation plan for pricing changes.

For a comprehensive view of ensuring the continuous growth of your business, Download a complimentary brochure on How To Drive Pricing Strategy To Accelerate Sales & EBIT Growth.

Are you a small or medium-sized business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 8607 7001.

You can also email us at team@valueculture.com if you have any further questions.