Improving Cash Flow with Better Pricing Strategies
by Ben Gran
Pricing is a major preoccupation of business owners, since it has many effects on the way your business performs and how it's perceived in the market. Charge too much and you risk losing market share; charge too little and you risk undermining your profit margins and being perceived as a “lower-value" option compared to your competitors.
Pricing affects every aspect of a business's brand. High prices are often a signaling mechanism to tell the market that your product is worth more than a competitor's, and trying to compete with bigger companies by cutting prices is often a mistake, as it undercuts your profitability while still failing to match the bigger brands' economies of scale. It's complicated to get the price right, but if done correctly, a good pricing strategy can be one of the most important ways to improve your cash flow.
Here are a few key pricing strategies to help increase your cash flow:
Many business owners are familiar with the idea of a premium pricing strategy. By charging more for its products than their competitors, a company can send a message to the market that its products are inherently more valuable, and that people should be willing to pay a premium price. Luxury goods makers pursue this same strategy with higher prices for designer handbags, jewelry, and other high-end products.
Business owners might be reluctant to adopt a premium pricing strategy because it might feel inauthentic—especially if their brand hasn't already attained a position in the customer's mind as being a premium product. Instead of simply raising prices, look for ways to charge more for your product while at the same time giving the buyer more value. For example, you could offer free delivery, free technical support, an extended warranty, or other guarantees to make the customer feel better about paying a higher price.
Premium pricing doesn't have to feel false or manipulative. In fact, this pricing strategy can be a good way to build trust with customers while also boosting your cash flow.
Many startups and small businesses use special introductory pricing as a way to launch a new product. By offering a product at a discount for a limited time, your company can get new customers interested to try it, and then increase the price after the product becomes more widely adopted. Another product-based pricing strategy is to sell a product as a “loss leader" that is deliberately underpriced, but requires add-ons, accessories, or supplemental services.
One great example of a loss leader is printers. The printer itself is often cheap and sold at a big loss, in order for the brand to make money on a recurring basis by selling printer ink cartridges. Consider if your product or service can be sold on a loss leader basis. By offering an initial discount or low price, you can secure a customer relationship that is more profitable for the long term.
Another pricing strategy is to keep a close eye on the pricing of your competitors, and then set your own prices in response to where the market is headed. Try offering a discount for entry-level products or basic services, and then charge higher prices for higher-value models or comprehensive service packages. Also integrate competitive analysis into your pricing strategy by having a clear-eyed view of which of your products are truly the best in their market, and which ones are not.
Put thought into adjusting your pricing so you can emphasize the premium value of your best products, while giving away a lower profit margin on products that don't sell as well. You might be less competitive in some market segments (and charge lower prices there), but this pricing strategy can allow you to focus on charging higher prices and reaping bigger profits from the flagship products—where you are truly the market leader.
Pricing constantly changes as companies adjust to new technology, rising (or falling) costs of supplies and inputs, new competitors, and overall dynamic conditions in the market. But if you keep a few key pricing strategies in mind, they can serve as a guide to help you make informed business decisions in setting prices in a way that creates bigger revenue—and bigger cash flow.
About This Author
Benjamin Gran is a full-time freelance writer specializing in blog articles, white papers, technical writing, speech writing and other business writing.
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