Guest Post

Don’t Guess if Crowdfunding Can Help Your Small Business – Know

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common excel questions

As a small business owner, you’ve probably heard of crowdfunding. You probably haven’t thought about how it could help your business. It depends on your industry and familiarity with technological trends.

I can’t say if it’s right for your business or not. Below, however, you’ll find some answers to the most commonly posted questions regarding crowdfunding for small businesses. Hopefully, this will help you decide if you want to do more research on the subject.

Think about the following:

  • You don’t want to be ignorant of something that could help your business, do you?
  • If others in your industry aren’t doing something then it’s not right for your business?
  • Why not ignore every technological trend that could impact your business?
  • What’s the biggest cost to adopting technological trends? Is it money or time?
  • How has adopting other technological trends worked out for you?

“Does Crowdfunding Need to Be Paid Back?” Types and Examples

Is crowdfunding good or bad?

Like anything, it’s not black and white. Crowdfunding has both good and bad elements.

Raising capital is hard and complicated. It takes a lot of time, effort, and dedication to be successful in this area. But if you want your business idea to come to life then you’ve got to do everything necessary!

There are many crowdfunding platforms out there and you can never be sure which one is right for your business. You can always apply to more than one (more on that below). Try not to get discouraged if there’s little interest in your first stab at crowdfunding. Just as it takes some salesmanship and marketing savvy to sell to your customers, the same will be needed here too.

Stick with reputable crowdfunding sites. If crowdfunding is unexplored territory, there’s no need to take unnecessary risks by dealing with disreputable or unproven platforms.

These are some well-respected crowdfunding sites (Source):

  • Kickstarter
  • Indiegogo
  • Crowd Supply

Crowdfunding is a good way to get the word out about your brand and it can help you find investors and customers. Crowdfunding could also speed up the product development process by committing you to specific deadlines.

The benefits of crowdfunding are numerous. From networking access with potential partners, getting feedback early before going into production, and being able to showcase ideas that might not otherwise meet investor criteria.

It also provides an avenue for testing demand outside traditional channels by gauging customer interest first-hand. This allows you to conduct valuable market research concurrently with your capital raising efforts.

“Where Can I Get Data for Market Research?” 6 Gov’t Sources

Crowdfunding can be humbling too. That’s one of the primary downsides.

There can be times when the feeling of rejection will make you feel discouraged. However, it’s important to just accept this and move forward. Waiting for your fundraising goals to be met might seem to take forever. Remember that patience is, sometimes, a virtue when running a small business.

How much money can you get from crowdfunding?

Crowdfunding is a type of funding that can help you get the funds you need to start and grow your business. It’s an amazing way to get your company off the ground and can be used to fund anything from movies and music projects to art and fashion. Most businesses will likely use crowdfunding for product development, however. Crowdfunding has become easier with websites like Kickstarter, Indiegogo, GoFundMe, and others.

What is crowdfunding?

Crowdfunding utilizes an online platform where people can pledge money to a project; generally for a reward in return. Crowdfunding allows you to gain exposure and raise funds to help start and grow your business.

How much money can you raise?

At some sites, like Kickstarter, there is no set limit for how much you can raise. Other sites have a limit or cap. Be sure to read the fine print and understand what to expect.

Many projects never get funded, so it’s important to keep expectations realistic. Also, be aware of the timeline. Your project may take a few weeks to a few months to raise the desired funds.

Risks and challenges of crowdfunding

Crowdfunding is an increasingly popular means of funding for small businesses. Although a good portion of the people who start a crowdfund fail, this is consistent with the other risks taken as a small business owner.

More than a few companies have already risen through crowdfunding. These companies are great examples of how the platform can help businesses that need funding.

9 Wildly Successful Crowdfunded Startups

Can you use multiple crowdfunding sites?

You can run more than one crowdfunding campaign at a time, but it’s not recommended. You could be juggling too many balls in the air if you do that. It can be difficult to find the time and energy to manage two or more crowdfunding campaigns along with your other obligations to your company.

You have a lot of commitments that need your attention, but it is not just about the workload. You may also receive inquiries related to the crowdfunding project. Be careful not to overcommit yourself.

Perhaps, the best way to use multiple sites for your business would be to start with one platform, then when your crowdfunding is over then you can start with another. Running back-to-back or concurrent campaigns can make you look a bit too desperate. Even worse, it might give the impression that you are trying to run some sort of scam. This is not the exposure you need when you’re trying to launch a new product or a new business.

Some Simple Advice About Small Business Trademarks & Copyrights

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You’re thinking of starting a business. You have a lot of great ideas, but you don’t want to work hard to bring those ideas to life – only to see someone else copy them and steal your success. There are protections in place, by law, that can protect you. But, you’re not sure exactly what they are.

Ultimately, questions about the law should be answered by a competent lawyer. So, I’ve included a video at the bottom of this post that contains input on the subject from an attorney. The authors of this post are not attorneys. However, it is hoped that this content can give you a starting point for seeking out the answers you need.

Questions to consider:

  • Are you absolutely sure that a trademark/copyright is necessary for you to be able to successfully conduct business?
  • Is a trademark/copyright more important than the execution of your business ideas?
  • Why not trademark/copyright absolutely everything you can regarding your business?
  • What assets would it make sense to spend the time/money/effort on trademarks and copyrights?
  • How can your business stand out in other ways (USPs) that can be trademarked/copyrighted or stolen by competitors?

“How Do I Write a Marketing Business Plan?” Breaking It Down

This post, for the most part, lumps copyrights and trademarks together. Though they both help to protect intellectual property, they’re not exactly the same.

Copyrights protect something your business created from being copied. For example, advertising, blog posts, or artwork.

A trademark protects something that identifies your business. For example logos, packaging designs, or taglines.

Can you start a business without a trademark?

No, you do not need a trademark to start your business, but it is highly recommended.

A trademark is something that represents your business and is part of its identity. It could be your company logo, name, or even a product or service exclusive to your business. A trademark protects and ensures that these items remain for your company only. It is also a reliable way to protect the reputation of your brand’s images.

Many aspiring business owners think about when to trademark their assets. Customers use trademarks to recognize your brand and build a relationship with your company. With all that said, no, you do not need to register a trademark to start your business. However, if you plan to scale your business and grow it into a large company, you should highly consider trademarking your business assets.

Registered trademarks

Creating a trademark is simple as long as you know what you are doing. It is not legally required to register a trademark, but it is strongly suggested. Once you claim something as your trademark, it becomes your company’s intellectual property and protects it from other companies trying to use it. Before claiming something as your trademark, you should look into the relevant database first to see if it has already been taken.

In the United States, you’ll want to search the USPTO’s Trademark Electronic Search System.

https://www.youtube.com/watch?v=QBjHY00K8V8

To search international trademarks, consider the WIPO IP Portal.

https://www.youtube.com/watch?v=lLe3jalTqlg

Registered trademarks offer more protection than unregistered ones. If a company registers your trademark, then that registered trademark would have more authority than your unregistered one. Even if you technically claimed it before them. A trademark that is registered would protect it in the country you register it in. This protection is extremely important when conducting business on a large scale.

Do You Need A Trademark For Your Business?

Small businesses that operate in one city or state often do not need to register a trademark to start their business. The act of getting your business license (if applicable) protects your company’s name from being used. So, you do not need to trademark it. This protection, however, does not extend further than the city/state that you are operating in. If you plan on operating in more than one area, it is a good idea to register the trademark for your company’s intellectual property. Besides, the benefits a trademark gives are not to be underestimated. They give your brand identity and something for your customers to recognize.

Do I need to copyright the name of my business?

No. It would be more appropriate to trademark a business name. Something you should only worry about as your business’s geographic footprint grows.

Copyrighting/trademarking allows you to make copies of something creative. It is done when you want legal proof that you are the creator or owner of a creative work. For example, say you wrote a thesis. If you don’t copyright it, it may be copied by other people. It is similar to anything your business creates. It is the formality undertaken to own and avoid being copied illegally.

Copyright and brand security

It would be best to copyright/trademark your business’s creative works when you think they could be copied. When you think someone could be planning to steal your concepts and original elements.

For example, say you own a restaurant, and someone copies everything you do. Even worse, that replicated restaurant is doing better than your business. If you have a copyright or trademark, that restaurant can be subject to liability.

Fortunately, though, filing for a copyright/trademark is pretty easy and can be done in less than 90 minutes.

Enlightenment about trademarks and copyrights

Trademarking and copyrighting creative works is great to prevent confusion – to distinguish your business from other companies.

Furthermore, it aids in branding. Customers need to get to know your brand to build trust, earn reviews, and bolster the public perception. Trademarking your brand can give you a distinct persona.

As stated earlier, copyrighting/trademarking your business’ creative works can also prevent other people from suing you. Think of it as a kind of insurance to save time, money, effort, and attention. Also, when you have an official trademark, others who infringe can be notified of their violation. At which point, you’ll have the option to take legal action.

Trademarking business name as a sole prop

Being a sole proprietor is one of the riskiest and challenging legal structures. Even though you have flexibility, it’s tough to manage everything about your business by yourself. So, as a sole proprietor, should you bother trademarking your business name?

It depends on the nature of your business. The industry, the business model, and the products/services. Trademarking/copyrighting certifies uniqueness. So, it is nice to have, particularly if your products and services are unique.

Logos and taglines help to build your company’s brand and to stand out from the competition.

Importance of Trademarking

Aside from preventing confusion, utilizing trademarks/copywrites in your sole proprietor business can help it to look more professional. It shows that you value the things you create and want to protect them.

As your business grows, you’ll want to be known for your symbols, logos, slogans, and other creative works. Having a trademark/copyright can protect your unique identity.

https://www.youtube.com/watch?v=LgijHpOB-xc

Is 6.2 A Good Retail Inventory Turnover Ratio? Is 8.0 Good?

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The weighted-average inventory turnover ratio for all retail is 8.0. Different types of retail businesses have vastly different inventory turnover ratios, though.

What does inventory turnover tell you? What do you do with the information? It can take a company years to determine the appropriate quantity of a product to hold in stock. Too little means your consumers don’t get what they want. Too much means you ‘re wasting precious storage space and your money is not working for you. Without a doubt, your product turnover is indeed a major part of the inventory management process.

Before we delve into the specifics, let’s go over some inventory basics.

What is meant by inventory turnover?

Inventory turnover, sometimes know as stock turn, is a calculation of the frequency of sale of a particular product in one year. In essence, it answers the question – “how many times did you sell all of your inventory?”

Inventory turnover can be measured by item, category, or (most commonly) in aggregate.

It is usually measured annually but can be calculated on a quarterly or even monthly basis too. Why annually? Well, a product is not sold in the same manner throughout the year. There is seasonality. Many products will experience peaks and valleys in sales over the course of a year.

So, measuring inventory turnover annually allows you to get a more comprehensive view of the issue. A comprehensive view of any situation will allow you to make more sound decisions.

What is the inventory turnover ratio?

The inventory turnover ratio is a numerical representation of your company’s inventory turnover.

The formula for calculating inventory turnover describes the sales of a particular item, compared to inventory held, over a specific period.

In simpler terms, it helps you to see how fast each product is selling out. Understanding how frequently every item in stock is sold, can improve your operations in a variety of ways, some of them include:

  • Purchasing new inventory
  • Storage costs
  • Maintaining appropriate stocking levels
  • The cash flow of the business
  • Storage space occupied by the products
  • Comparing your business to a benchmark (competition)

Calculating inventory turnover for retail business

The formula used for determining retail inventory turnover is:

Inventory turnover = cost of goods sold (COGS) ÷ average inventory

The term “average inventory” is noteworthy because, at any specific time, the value of your inventory can drastically change. It can be disproportionately high at one point in the year and disproportionately low at another. Thus, in order to reflect precise and accurate figures, an average is used in the calculation. Using average inventory to calculate stock turn will yield more accurate results.

To be honest, average inventory is approximated. It’s not necessary or practical to figure the average based on day-to-day or hour-to-hour levels. Rather, you can add the beginning-of-year and end-of-year inventory dollar values and divide by two. Alternatively, you can use the highest and lowest month-end inventory dollar values. It doesn’t matter which you use, as long as you’re consistent.

What exactly is a “good” inventory turnover ratio for retail?

A retailer, like every other business, always seeks to grow its sales and consequently its profits. In order to do so, a retailer has to utilize the inventory space it has.

There is a fine balance between having too much product on hand and too little. As mentioned previously, too much inventory is costly. Too little inventory probably means you are compromising on sales.

A good inventory turnover ratio for retail is a subjective thing. It depends. Retail encompasses a lot of different types of businesses. Here’s how I went about answering this question.

First, I found a good article with turnover ratios for different types of retail businesses. Source.

Then, I referenced Census data to find the number of establishments in the U.S. for each type of retail business. Source.

Here’s another post where I write about the valuable information that can be found on the Census website.

Then, knowing the number of establishments for each type of retail business, I was able to come up with a weighted-average inventory turn ratio for retail businesses.

Here’s what that looks like:

Retail BusinessNAICS Code# of EstablishmentsInventory Turnover RatioWeighted-Average
Womens clothing44812032,9414.3.55
Jewelry44831021,3001.4.12
Shoes44821024,7162.4.23
Pet supplies4539109,9976.2.24
Furniture44211023,6153.5.32
Sporting goods45111021,4222.7.23
Supermarket / grocery4451064,93814.73.74
Beer, wine, liquor44531034,5106.2.84
Hardware44413015,0312.8.16
Baked goods3118116,91557.51.56
TOTALS255,3857.99

In general, you could say that turning inventory over 8 times (7.99 rounded) is average for retail. “Good” might be considered anything above and beyond that.

That won’t really tell you much, however. As you can see by the table, the inventory turnover ratio varies wildly depending on the type of retail business. The range goes from 1.4 for jewelry to 57.5 for baked goods!

If you’re really astute, you’ll probably notice a correlation between the inventory turnover ratio and what the retail business sells. The more durable the products, the lower the turnover. Cost and shelf life also play a part.

So, the real answer to “what is a good inventory turnover ratio for retail?” is “what is the average inventory turnover ratio for your type of retail business?”

But, that comes with an important caveat!

What also must be asked is “how many times did my business stock out and lose sales?”

Because, if you’re losing sales, a high inventory turnover ratio doesn’t mean much.

Be sure to keep things in context.

Interpreting retail inventory turnover

You might think the greater the inventory turnover ratio the better. However, there are some exceptions. You could be purchasing goods in lower than ideal quantities, which will eventually lead to higher shipping costs and out-of-stock goods.

A low inventory turnover ratio can mean poor output from your sales team or a decrease in your products’ popularity. Perhaps your prices are too high. Or, maybe you’re not marketing properly. Whatever the reason – it translates into products remaining too long on your racks. Storage costs can be high, and they continue to pile up as inventory goes unsold.

Why it is important to calculate your inventory turnover?

Maybe you already actively manage inventory turnover and are looking for strategies. Or, maybe you’re new to the concept and are interested in the benefits that management can bring to the business. Either way, if you own a retail store, it’s important that you monitor this metric.

Here are some of the benefits of measuring inventory turnover in your retail store.

You are financially better off

If you are looking for one KPI (key performance indicator) for your business, inventory turnover is it.

The calculation is valuable if you look for financing from banks too. Since inventory is always set up as security for a loan, companies want to make sure that the product is easy to market and can be converted into cash quickly.

You’ll make better business decisions

Closely managing stock turns allows you to make better purchasing choices. Then, you’ll only keep the storage space for the products that are actually selling. Hence reducing your storage costs, which, in turn, allows you to be more flexible on price.

Some of the decisions that can be made using inventory turnover ratio include;

  • Which products need to be purchased
    • If the ratio is too high for a specific item, that could be an indicator that a particular product should be ordered more often. Is it stocked out a lot?
  • What units must be moved
    • Inventory turnover may indicate when certain products should be given better “real estate” in the store.
  • What needs to be scheduled in advance to provide plenty of flexibility
    • By understanding the frequency of an item that turns annually, you can plan better to avoid stockout situations.
  • Once you have a proper control over your product turnover, it gets easier to tackle the aforementioned situations quicker
    • You’ll likely develop a system or process that facilitates more efficient inventory management.

As a retailer, it is important to ask yourself whether your products are turning faster or slower than they were last year. If so, why?

Has the expected level of sales changed? Do your inventory management processes need to be tweaked?

Inventory turnover has a huge impact on your retail business

Remember, inventory (no matter what type) is the same as taking cash and placing it on a shelf. If it just sits there, it does you no good.

Inventory turnover is a relatively simple thing to measure and it can have a huge effect on your retail business’s success. If you’re not currently managing inventory turnover in your retail business, consider doing so.

“How To Calculate Profit Margin?” Any Percentage

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30% margin calculate featured

If you know the price of something, you can calculate the cost that will give you a 30% margin as follows: Cost = Price × 70% (1 – margin %).

In business, the very existence of an enterprise is determined by its profitability. Making a profit can be an elusive process, requiring a good understanding not only of the Cost of Goods Sold (COGS) but also the functions performed to sell the product or service.

There are many models that help define costs so that profit margins can be properly calculated. Choosing the best model is critical to establishing proper pricing levels. The math involved in calculating a 30%, 40%, or 60% margin isn’t the difficult part of the process. It is determining the right starting point that requires the most scrutiny and clarity.

Easy to Say But Hard to Do

The first thing to consider is – have all the relevant and pertinent costs been included in the final cost calculation? This is where many companies become confused and the process of determining costs can become quite complex.

Unless the true costs of a product or service are known, any calculation related to profit will not be accurate. This failure to incorporate all relevant costs could end up costing a company dearly.

It’s All About the Budget Baby!

Putting together the costs associated with a product/service includes much more than the obvious costs (material, labor). These are the beginning point for the calculation, but there are other areas that should also be included in the formula. Consider the following:

Invoice Amount

Does the invoice include any discounts for early payment or penalties for late payment? Those numbers should be included in the costing formula.

Handling Costs

If the item is delivered or picked up, there will be a separate cost involved in its transportation. There are also the costs associated with handling the item after its receipt like inventory and warehousing expenses.

Cost of Money

Products that sit on the shelf for an extended period of time have company money invested in them that is not producing at income while it is tied up in inventory. This is known as an opportunity cost.

Taxes

Like death, taxes are inevitable and the costs involved in paying taxes on inventory or property held at the end of a tax year can add to the product’s true cost. Inventory that turns quickly isn’t as much of a concern as inventory which takes a long time to get sold or used.

Overhead

This is always a loaded question with an explosive answer. What is overhead and how should it be allocated? Calculating overhead accurately is a science unto itself. Determining how to allocate it can be problematic at best.

Fudge Factor

Also known as “budget override” or “other costs.” This is an amount added to other costs to make sure nothing is left out of the calculated amount. In most cases, this is an additional 2% to 5% to help cover any unexpected changes.

Add It All Up and It Spells True Cost

The cost of acquisition, handling, overhead, and other considerations have been added up. A final total true cost has been determined. Now what?

With all that formulation and processing, the resultant number is one you can have confidence in. Now that we’ve looked over what the true costs are we can finally multiply it by 30%, 40%, 60% and there’s the sales price. Right?

No.

Markup is not the same as margin. But, more on that in a bit.

Price is what determines margin

Knowing the true cost is the first step, but now it’s time to look at the selling side of the equation. Here are some other factors to consider:

Cash Flow

Is the product or service sold and paid for immediately or does it go on an account for 30 days or more? Are there discounts offered for prompt payment or pre-payment of invoices? Will the buyer earn volume discounts for large orders or is a discount earned over time based on volume?

Associated Costs to Deliver

Sales programs offering free freight or trips to Hawaii for sales associates are additional costs that should be estimated when determining overall profitability.

Negotiation Protocols

Some companies state their prices and no one challenges those prices; other companies state a price but they know the customer will be negotiating the price based on different issues. Allowances should be made to include any fluctuations involved as a result of negotiating the price for the product or service provided.

After-sale Follow-up

Once the product or service has been delivered the costs associated with the transaction aren’t done accumulating. After-sale follow-up by customer service, warranty expenses, and product administrative costs like safety notifications or updates add up quickly and should be taken into account.

Inflationary Issues

Not all inventories are subject to inflationary conditions but many companies find themselves confronted by the costs associated with wider economic issues. Issues that could alter the costs of inventory or services. Construction, manufacturing, and many other industries are constantly facing changes in local, regional, and national economic conditions that affect their business at its most basic levels.

Margin vs Markup

These are two terms that are often mixed. They are similar (even sound similar!) but they are not the same.

Margin can only approach 100%. Markup can be an infinite percent.

Markup is based on cost. It is calculated by dividing profit (gross, operating, or net) by cost.

Say something costs $1.00. If it’s marked up 30%, the price would be $1.30. If it’s marked up 60% the price would be $1.60.

Margin is based on price. It is calculated by dividing profit (gross, operating, or net) by price.

Say something costs $1.00. If it has a 30% margin, the price would be $1.43. If it has a 40% margin, the price would be $1.67.

Price = Cost ÷ (1 – margin %)

Here are some more comparisons of margin and markup:

PriceCostMargin %Markup %
$1.00$1.000%0%
$1.43$1.0030%43%
$1.67$1.0040%67%
$2.50$1.0060%150%
$3.00$1.0067%200%
$4.00$1.0075%300%
markup vs margin graph
Click to enlarge

Retail, Wholesale, or Manufacturer – The Rules Still Apply

So, is a 30%, 40%, or 60% margin good?

It depends.

It depends on whether you are talking gross margin, operating margin, or net margin. It also depends on the industry and business model you are referring to. Every business and industry is different. What’s good and what isn’t can only be determined when comparing to an appropriate benchmark.

Some industries work with high profit margins and others work on minuscule margins.

Regardless of where an organization stands in the supply chain, the need to maintain profitability is important. Advanced accounting methods combined with software that can quickly search through data to extract the most important information makes the process of assigning costs much easier and much faster.

However, the need to incorporate all salient costs and related expenses can become burdensome and overly detailed if not monitored for accuracy and applicability. Traditional models have been replaced by highly-customized programs that reflect the conditions of individual companies rather than using industry-wide standards for calculating costs.

Protecting the Margin

Knowing the true and detailed costs of a product or service is critical in a competitive environment. If margins start to slip, most businesses will go to their suppliers looking to save money and maintain profit margins by asking for discounts. Or, they might take other cost-saving measures.

Any Way You Cut It, Margin Still Matters Most

The discussion over the difference between the terms “margin and “mark-up” are arguments over the same thing – profit. Unless an organization is a non-profit, its goal is to make a profit and to do so for as long as possible.

Net profit is often called the “bottom-line” and it still defines an organization’s character and capability to many. Every financial analyst, stockbroker, and business columnist focuses on a company’s ability to not only generate a profit margin but to do it repetitively and under a variety of conditions. Knowing the numbers and figures that determine the actual costs for a product or service leads to the opportunity to produce the desired margin more readily and realistically.,

5 Pricing Strategies | Gain Market Share for Your Small Biz

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Competitive, premium, value-based, skimming, and penetration are five of the most used strategies in pricing goods and services.

Price is an extremely important factor for consumers. In fact, it is the number one factor in deciding where to buy. Pricing products properly is essential to obtain good financial results and still guarantee profit for your business. Today, consumers can buy from wherever they want, whether through online stores, apps, social media, etc. In addition, they can also compare prices using Google Shopping or specialized price comparison sites. The point is, buyers are smarter, so you also need to be. For this reason, consider the following strategies for attracting customers and increasing sales.

How does the customer evaluate the price?

Before we talk about pricing strategies, you need to understand how the consumer evaluates this variable. It’s not just the numbers on the label. There is a subtle difference between the price of your product and the value it has. It is the comparison between these two factors that will make your customer assess whether the merchandise is priced low, high, or fair.

The price is the investment made by the consumer in the purchase of this merchandise and involves the cost of production, taxation, profit margin, and operating costs.

Unlike price, value is not based on numerical data, but on subjective aspects of the consumer. The value refers to the extent to which a product meets the customer’s needs and the benefits that the customer perceives in the merchandise compared to the investment he will make at the time of purchase. Value is what makes customers willing to pay twice as much for a certain brand in relation to another with the same specifications.

Therefore, it is important to ask yourself what is the benefit that a customer sees in your products and how much they are willing to pay. With that in mind, consider the following pricing strategies.

1) Competitive pricing

This strategy relies on competition to define the final price of the product. This is common when your product or service differs very little from that of your competitors. Therefore, you adapt their price. Companies competing in a highly saturated space prefer this strategy, as the slight price difference may be a factor influencing the decision for buyers.

With this strategy, you can price your product slightly cheaper than your competitor’s, use the same price as your competitor’s, or set the price slightly more expensive than your competitor’s. Note that there is always a market leader that sets the standard, and competitors follow it.

The objective of the competitive pricing strategy is to increase the number of customers or increase market share by attracting customers from competitors. However, keep in mind that no matter what price you have chosen, competitive pricing is a path that will help you stay ahead of your competitors and dynamically maintain your pricing.

2) Premium pricing

This is a pricing strategy where you set the price of your product or service above the normal market price. This can make consumers think that your product has something special and of greater value than those offered by your competitors. Although this pricing strategy may make other consumers not buy from you, that’s okay. Because one of the premises of this strategy is that higher-priced products create a different perception of the market.

However, you should study your product and think about why it should be more expensive than others in the same category. It does not make sense that you raise the price of a product that does not really meet consumer expectations, or that the competition offers one that surpasses yours at a lower price.

3) Value-based pricing

A value-based pricing strategy is when companies price their products or services based on the consumers’ willingness to pay. In short, the price is set according to the perception of the buyer’s value on the product. Here, even if a product is assigned a higher price, consumers will still be willing to buy the product. However, it is difficult to measure the value that customers attach to a product. Therefore, you must work to establish the correct estimates.

If used correctly, this strategy can boost customer trust and loyalty. Likewise, it can help you prioritize your clients in other facets of your company, as well as marketing. On the other hand, the value-based strategy requires that you know your customer avatar well.

4) Price skimming strategy

Skimming pricing is the setting of a high price for a product or service in the initial period of sale and gradually reducing the price of that product or service later. This is done to reach more general consumers.

One of the biggest benefits of using this pricing strategy is that it allows businesses to maximize profits thanks to so-called early adopters. Lowering the price end up attracting those consumers who are much more sensitive to the price of a product or service. This strategy is suitable for products that have a short life cycle, such as those that are really trendy.

Before implementing this strategy, you should first understand the following:

  • The strategy will be more effective when there is little competition (when you enter, you lower the price gradually)
  • You can implement this strategy as long as your product or service has the necessary quality to be able to be purchased at a high price in its introduction phase
  • Being a more expensive product, in the beginning, you need to target a segment of the population that has a higher economic profile

5) Penetration pricing

Penetration pricing is the initial low price setting for a product. The goal is to set a price to get a large group of customers interested in buying. When the products’ sales increase, the price is returned to the same level as the competitors.

Penetration pricing is suitable for products that can replace other products. For instance fast-moving consumer goods such as vegetable oil, detergents, soaps, toothpaste, instant noodles, and so on.

As for the progressive rise in prices, be very careful. You will have to take great care of the volume of these increases. If they are drastic, you will lose many customers as fast as you have gained them.

Clear examples of this pricing strategy were used by Netflix and Amazon.

Both offered quite affordable prices for great service, and have recently raised their rates. However, they have become necessary in our lives, and we consider that even with the rise, the price is still affordable for what they give us in return.

In principle, this strategy can make you known in the market and attract buyers, but it can also hurt your bottom line. Therefore, you must know your costs (and margins) so as not to incur losses.

StrategyProsCons
CompetitiveGain market shareLower margins
PremiumHigher marginsHigher cost + quality
Value-basedCustomer satisfactionDifficult to measure
SkimmingHigher (initial) marginsOnly for certain products
PenetrationGain market shareLower (initial) margins

Important tips for defining pricing strategies

These pricing strategies, when thoughtfully applied, have the power to attract customers to your business. However, it is important to evaluate other aspects before changing the prices of your products or services. So here are some tips to help you at this point:

Pay attention to your costs

Even with the increase in demand, reducing the prices of your products without observing the costs of production and acquisition of your merchandise can cause serious losses to the business. So, evaluate this information well when setting pricing.

Define your strategy in relation to the competition

Before setting a price, it is important to check how your company wants to position itself in front of competitors. Does your company want to offer more for the same? More for less? Or more for more?

Try not to set high prices for products of lower quality than those offered by competitors. This is the worst pricing strategy that your company can adopt.

The low price does not retain customer loyalty

A low price may attract more consumers, but that is not what will turn them into loyal customers. It is necessary for your small business to set itself apart and make consumers return. To distinguish itself through the agility of employees, the quality of service, or the environment of the establishment.

Count on the right tools

Price is an extremely dynamic variable. Controlling and managing all this through spreadsheets can be cumbersome and is prone to human error.

Software exists that can optimize your price management process. Find the tool that best suits your needs and makes your routine easier.

A guide to the five main pricing strategies

These are pricing strategies that can be applied in every business. Each strategy has its advantages and disadvantages. So, you must weigh those pros and cons.

Don’t limit yourself to using only one of these strategies. Combine them, and mix as many strategies as you require. This will help you find the one that guarantees sales, the flow of consumers, and positive results.

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