How to review and improve your pricing strategy in six small steps

As a business coach, at the beginning of 2020 — the beginning of the pandemic — I noticed an awful pattern among small business owners.

They were cash strapping their businesses.

They had nothing in reserve to cope with what we “thought” was going to be a short term thing — shut downs.

Their businesses weren’t exactly profitable, but simply sustainable. They were trading week to week, month to month to stay in business.

They appeared to have no cash reserves to survive short term interruptions to business.

So if they were profitable on paper and not in their bank accounts, one of the questions to ask is “when did they last look at their pricing strategy?”.

Having a fluid, often looked at and examined pricing strategy is just one key to being profitable in small business.

With four out of five businesses failing in the first five years (and that’s a pre-COVID stat) and many small businesses appearing to be cash strapped at the end of the day, it would appear that many small business owners are spending most of their time in their businesses and not working on their businesses.

It begs the question: what’s your pricing strategy?

What pricing strategy?

If you’ve just answered blankly “What pricing strategy?”, you’re not alone.

You see, some retailers look at their pricing strategies biannually, some annually and some never do.

But the reality is that your pricing strategy is a liquid document that needs to be looked at when receiving every single invoice — yes, every single invoice.

Why? Well, because wholesalers have in their conditions of sale that prices can be changed without prior notice (and you probably don’t notice!); freight charges change; your business’ fixed and variable costs can change; and, frankly, your buyers change too!

So, by looking at every single invoice, you can keep an eye on changes and you stay as profitable as possible.

Cash flow is king, after all because let’s face it, at the end of the day, we are in business to make money.

Pricing considerations

When calculating a retail price for your stock, do you take into consideration:

GST;
Freight (inwards and perhaps even outwards if you sell online);
Fixed costs such as rent or rates;
Packaging prices — bubble wrap and tissue paper has a cost too;
Variable costs such as wages (staff and your own), electricity, phone; and
What your profit goals are for the quarter/year and so forth?

Put simply, do you know how much each item actually costs you?

For many in retail, pricing decisions are made based on emotions; on whether they think their customers would pay that amount or not. Alternatively, businesses go looking at their competitors and see what they have priced the same item at… despite having no idea of what their pricing strategy is.

At the end of the day, the products sold need to ensure you are meeting your financial goals and continuously growing your business.

As we make our way through the start of 2022, it is perhaps the perfect time to change your mindset around your prices, implement a system or policy around your pricing strategy and started selling things with the true margin required to be profitable, sustainable and to reach your financial goals.

Where to start

Review your profit goals (or set new ones)
Review your prices
Compare old and new supplier invoices
Work out which products make you the most money and which ones just aren’t profitable enough. Then make strategic decisions based on this information, because your business depends on it
Sit down and work out your fixed and variable costs
Make sure you are adding GST and inward/outward freight to each item, over and above your normal mark up

It seems so simple, but unfortunately, it’s not. It takes time, effort and energy to help you with the ebbs and flows of business and pricing.

Running a small business isn’t easy, but it can be made simpler with the right advice and help.