How to Set Prices in a Recession

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Running your own business can be tough. One of the most challenging aspects, undoubtedly, is knowing how to set prices -- which is the case with any business, but especially true of smaller ones. 

There's generally a few ways to go about assessing prices, but one of the more conservative courses of action is to use a consulting agency to give you personalized advice relevant only to your company and your situation and goals.

Channel IQ is one such local option The consulting company recently launched and specializes in e-commerce as it pertains to manufacturers, retailers, and distributors. Inc. Well rang up Channel IQ CEO and founder Wes Shepherd to go over some common mistakes made with pricing and how new businesses can avoid them.

Why is pricing such a difficult art to master? 

Wes Shepherd: I think we can agree it's the most important thing in business. [Laughs.] It's precedent to transacting. I think that it's always weighing on people's minds and it's a bit of an art and a science. When you think of pricing, you have to think of every aspect of your business. The inputs. The value you're adding. The perception of value to customers. Competition at various levels. Then when you get into highly featured products it gets incredibly difficult to break down the value or the perceived value of those features.

Can you give an example?

If you were selling hot dogs, it'd be pretty easy to figure out your competition in a small geographic area. It's pretty well commoditized. You have ketchup, mustard, buns, hot dogs. It's pretty easy to price. But if you're doing cars or software, it gets pretty crazy. 

One of the most important things is you really, really have to understand where the market is pricing similar products or I don't think you can even make good judgments on your pricing. 

Given how crummy the economy has been, has there been more of a consensus regarding pricing? Or is there more paranoia?

I think it's going to vary by markets. In some areas people have been holding price because they have no alternative. Their input costs are going up. In some cases you're seeing people raise prices. There's definitely some commodity-type item prices going up. 

In the market we definitely see manufacturers much more concerned with competitive visibility as well as downstream visibility to what their retailers are selling products for. So they're balancing the ecosystem better. If you're just the maker and the seller of the product it's one thing, but if you make it and then distribute it to retailers then the complexity in pricing gets exponential. You have to control and manage for prices in thousands of retail outlets for example.

How important is the competition's prices? Is that something people should be monitoring very closely or do they not need to concern themselves with it?

Differentiation is usually the No. 1 factor in competition. If they have very similar products they're going to have to have similar prices. If they're able to differentiate themselves either through functionality or in quality, that's an area they can differentiate on price relative to competitors. Lastly, brand strength is everything.

I don't buy sugar based on brand, but I certainly buy a lot of other items based on brand. Typically I'll pay a bit of a premium for a brand if it represents quality, durability, ease of use, and other things that may or may not be present but it's perceived -- there's pricing strength there. 

What common mistakes do new business owners make when setting their prices?

New entrants to the market tend to price too low to gain market share. Then they have trouble regaining prices. They might pick up some market share but then their customers will be resistant coming off that share. Those companies will have significant margin pressure, and they won't have money to reinvest and grow the business to the next level. That's probably one of the most common things I see out there. They come in, they're under-capitalized, they're aggressive to get whatever business they can, and then they start running on fumes once they've consolidated some of the low-hanging fruit in the market.

What can people do to prevent that from happening? Is it just a matter of setting higher prices out of the gate?

If you're small and growing and you don't have a dominant position you're going to be forced typically to pick a lower-market strategy. One of the things I often say is you never want to be in the middle of a market because you get squeezed from people on the top and people on the bottom.

The people on the top will take a high-price strategy. They will heavily differentiate a product or service. The people on the bottom will take the commodity approach. They know their customer segment's not going to care about differentiation. They're gonna have to get into an all-out price war. These two segments tend to consolidate in the market place. And in the middle? If somebody hasn't been able to forge a strong position, they're getting eaten from both sides.

What costs do people tend to overlook when re-evaluating their prices?

Most of my experience is with technology-enabled services. A lot of the costs that are overlooked there is really how much time you really spend with that customer. What the internal man-hour cost is. People don't typically measure that very well. I could look at my technology costs and amortize that over my customers based on their software usage. That and management time. It's never perfect and it gets lost.

What advice do you have for beginners?

Ultimately price relates a lot to brand. If you have a low price, it's going to be hard to build a premium price. If you have a high price, people at least initially you're building more of a premium brand and look for the features and the quality and the evidence to back that up. As you get to be a market leader you really need to hold on price and manage the market perception of your product. That means managing your pricing.

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