It’s a prime time for small business owners to reevaluate their pricing strategies. Pricing analysis is crucial, not just for profit maximization, but also to ensure you’re delivering value to your customers. We recommend you do this exercise at least yearly. In this blog post, we’ll guide you through the steps to perform an effective pricing analysis for your small business. 

Step 1: Listing Products and Services

The first step is to create a comprehensive list of all your products and services. I like to do this in Excel. This inventory should be detailed and include every item you currently offer. Reviewing your past 3 – 6 months of invoices might be a good place to start creating this.  ChatGPT may be helpful as well to develop a list of common services for your business if you would prefer not to start with a blank slate. The list may even include some items you want to add soon. Understanding the breadth of your offerings is crucial for a thorough analysis. (Pro-tip: This listing can then later be used to create Standard Operating Procedures for your team for each product/service.) 

Step 2: Identify Inclusions 

Next, clearly identify what is included with each product or service. This step is about understanding the full scope of what you offer. Are there any additional features or services that add value to your primary offerings? Make sure these are well-documented. 

Step 3: Determine Customer Value 

Now, assess the value your customer receives from these products and services. This is a two-fold process: consider the referential value, which is the basic utility or benefit the customer gets, and the differential value, which is what sets your offering apart from competitors. What unique benefits or solutions does your product provide? Ideally you will already have developed a clear idea of your Target Market. Be sure to connect with the value you will be offering this specific niche. This step, along with the previous one, can be used for your marketing communications as well. 

Step 4: Consider Cost as a Lower Barrier

While pricing above cost is fundamental, consider cost as a lower internal barrier. Your prices should cover your costs and leave room for a profit margin, but this is just the starting point of your pricing strategy. 

Step 5: The 12 Drivers of Price 

At this stage, it is helpful to refer to the 12 Drivers of Price, a framework that helps in understanding the numerous factors that can influence pricing decisions. You can download a detailed PDF we have created on these drivers here.

Step 6: Select Relevant Drivers

From the 12 Drivers of Price, choose 3-4 that are most relevant to your industry and business model. These might include factors like corporate strategy, competition, communication, and cross-selling. Each industry will have different drivers that are more influential. 

Step 7: Calculate Prices Based on Chosen Drivers

Using the selected drivers, calculate your prices. This involves a detailed analysis of how each driver affects your pricing strategy. For instance, if market demand is a key driver, your pricing might be higher for products in high demand. Consider re-vamping any products or services that are not providing enough value in the marketplace or are priced higher than your target market is willing to pay.  

Step 8: Venn Diagram Comparison for Perfect Pricing

Finally, employ a Venn Diagram-type comparison to find your perfect price. This method involves overlapping circles representing different pricing factors like cost, customer value, and market competition. The intersection of these circles is where your ideal price point lies. Share this pricing analysis with your team, advisors and partners to get their feedback before implementing it. You will be shocked to hear the creative ideas they will offer up.  

 

Performing a pricing analysis is not just a one-time activity but an ongoing process. By at least annually revisiting and adjusting your pricing strategy, you can ensure that your business remains competitive and profitable. Remember, the goal is to find a balance where you can maximize your profits while still offering immense value to your customers. Start now to set the tone for a successful year ahead.