Inc. Magazine asks the question this month in an excellent article by Alison Stein Wellner which I recommend to anyone, not just small businesses. She talks about the cost-plus trap, avoiding commoditization, objective and perceived value, and touches on intelligent discounting.

I see lots of companies, and almost all entrepreneurs, pulling prices out of the air and reflexively discounting during negotiations. This frequently leads to low prices and the challenge of raising them, which is much harder than setting them “right” in the first place.

Even so, “right” doesn`t necessarily mean “higher.” Prices (and discounts) should be targeted to particular segments to reflect the value those segments perceive in an offering. Entrepreneurs often have great customer service in their DNA and go all-out to satisfy customers with last minute orders, rush delivery, and other costly efforts. In addition to charging extra for this value, many customers would like a lower priced offering that strips out the expensive extra service or other features. By targeting the high, middle, and low end of the price spectrum, entrepreneurs (as well as larger business) can increase revenue and profit at the same time.

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