4 Pricing Strategy Considerations Small Business Leaders Should Keep in Mind

As a consultant who has advised hundreds of small business owners and entrepreneurs over the last 15 years, I‘ve seen firsthand how impactful pricing decisions can be. With typically low profit margins (less than 5% on average according to JPMorgan Chase research) and limited resources, small businesses must optimize their pricing strategy to survive and compete.

The right approach can boost customer loyalty, attract new buyers, and improve cash flow. The wrong strategy may erode margins further during those delicate early stages. Here are four pricing considerations every small business leader should keep top of mind:

1. Should You Offer Subscription Pricing?

Subscription business models have grown rapidly in recent years thanks to SaaS companies. By charging recurring fees for continued access to a product or service, subscriptions can provide more reliable revenue. However, they aren‘t universally applicable.

The Case for Subscriptions

  • Maximize recurring revenue – reduces continually acquiring new customers
  • Build customer loyalty via discounts for long-term subscribers
  • Opportunity to upsell subscription add-ons over time
  • According to Zuora, subscription businesses grow revenue over 5x faster than S&P 500 companies

Potential Downsides

  • Don‘t work for one-off or infrequent purchases
  • Adds complexity around managing recurring billing
  • Churn can erode margins if new customer acquisition stalls

For Mark Collins, owner of a small landscaping company in Ohio, transitioning to subscription-based maintenance plans increased recurring revenue by 30% in just 1 year. However, Collins split his offerings so customers could still pay per lawn mowing service if preferred. Adopting this "hybrid" approach is a smart way for small businesses to experiment with subscriptions without overhauling their entire model.

2. Can You Gain Market Share by Lowering Prices?

This pricing technique helped mega-retailers like Walmart expand dramatically to achieve economies of scale. However, small businesses must carefully weigh the risks and rewards of temporarily lowering prices to grow market share in their niche.

Potential Benefits

  • Increased market share in a small niche can boost long-term revenue
  • Achieve lower customer acquisition costs over time
  • Opportunity to raise prices later once market position solidified

Downsides

  • Difficult to maintain already thin margins for prolonged period
  • Larger competitors may retaliate with deeper discounts you can‘t match
  • Marketing essential to ensurecustomers aware of lower pricing

Pet goods retailer Chewy.com managed to steadily wrest share from Amazon and big-box stores using penetration pricing in a growing niche. Small B2C ecommerce businesses in particular may find this effective. However, small shops with limited working capital often can‘t withstand the temporary margin hit. As a small business consultant, I always advise thorough financial modeling before attempting this risky pricing technique.

3. Could Premium Pricing Tiers Work?

This pricing model involves offering higher-priced packages with expanded features or benefits compared to base offerings. Premium tiers help small businesses serve a wider range of customer budgets. The key is framing upgrades effectively to align with buyer willingness to pay more.

Potential Upsides

  • Higher profit margins on premium offerings
  • Meet needs of upmarket buyer segments
  • Reinforce perception of exclusivity or luxury

Watch Out For

  • Customers unwilling to pay beyond a modest premium
  • Requires extra marketing spending to promote tiers
  • Risk of diluting core brand identity

A 2021 Rockwell Marketing survey found 60% of SMBs saw success with multiple pricing tiers. For example, a contractor may offer basic, advanced, and luxury kitchen remodel packages. This model works best when small businesses deeply understand their customers. Unique benefits that clearly warrant premium prices help as well.

4. Can Your Margins Support Price Matching?

Price matching means pledging to match competitors‘ pricing for similar products/services. This can lure in price-sensitive shoppers. But for smaller players, attempting to match prices from larger companies with more scale and lower costs can quickly destroy margins.

Potential Benefits

  • Attract customers focused mainly on price
  • Drive higher sales volume in the short term
  • Reduce loses from customers price shopping

Risks

  • Extremely hard for low-margin small businesses
  • Could spark race to the bottom among competitors
  • Must maintain strong marketing to shout about deals

Unless a small business sits among the category leaders in their niche, I typically advise avoiding price matching. The brand exposure isn‘t worth torpedoing margins over an extended period. One exception – using very selective or targeted price matching sparingly during slow periods or on stagnant inventory.

Conclusion

Finding the right pricing strategy is crucial yet challenging for small businesses operating on narrow margins. Before making major decisions, analyze your customer demand profiles, market competition, and cost structures. Pilot test changes first whenever viable too. With thoughtful planning, pricing often represents an area of major upside for small business owners.

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