For small and medium-sized enterprises (SMEs), setting the right price is often one of the most challenging aspects of running a business. Whether it's fear of losing customers, uncertainty about the true value of their product or service, or simply neglecting to review prices regularly, many SMEs find themselves struggling to get pricing right. The consequences of this struggle can be severe: missed revenue opportunities, low profit margins, and stunted growth.
In this article, we’ll explore the three most common reasons why SMEs struggle with pricing and provide practical strategies for overcoming these challenges.
1. Lack of Confidence in the Value Proposition
One of the primary reasons SMEs struggle to price correctly is a lack of confidence in their value proposition. A value proposition is the unique benefit or advantage your business offers that makes customers willing to pay for your product or service. It’s also what differentiates you from competitors and convinces customers to choose you over other options.
Many SMEs, particularly in the early stages, suffer from self-doubt. They may worry that their product or service isn’t good enough to command a higher price or that customers won’t see the value they provide. As a result, they often lower their prices in an attempt to stay competitive, which often backfires.
How to Overcome This:
The first step is to define and refine your value proposition. Articulate clearly what makes your product or service valuable. Is it superior quality? Faster delivery? Better customer service? Focus on the benefits that set you apart from the competition and communicate these to your customers.
Also, gather customer feedback. Talk to your customers about why they chose your product or service and what they value most. This feedback will help you understand how your offering is perceived and may reveal areas where you can justify higher prices.
You should consider showcasing your differentiation. Differentiation is key to commanding higher prices over ‘me toos’. If you can demonstrate how your product or service is unique, customers will be willing to pay more for it. Highlight what makes your offering better—whether it's innovation, convenience, or exceptional customer support.
Lastly, experiment with pricing. Small-scale safe experiments can test different price points. Running these safe ring-fenced experiments on price, such as when entering new markets or with new products, can reveal insights into what customers are willing to pay without risking your entire business.
2. Fear of Insufficient Sales and A Belief That Low Prices Help
Another major reason SMEs struggle with pricing is the fear that raising prices will drive customers away. This fear is particularly prevalent among businesses that operate on tight margins or in competitive markets. Many business owners believe that keeping prices low will guarantee sales and help pay the bills, but in reality, this approach can lead to unsustainable business practices.
When SMEs set their prices too low, they may attract price-sensitive customers who are less loyal and more likely to switch to a competitor for a lower price. This cycle can result in what I call the "busy fool" syndrome - where businesses are constantly working flat out but not seeing enough profit to support investment into growth.
How to Overcome This:
Start by segmenting your customers. Not all customers are the same, and price-sensitive customers are not necessarily your ideal customers. Identify the segments of your market that are willing to pay more for premium offerings and focus your efforts on attracting and retaining them. Premium customers are often also more loyal and more profitable.
Focus on value, not volume. Instead of trying to increase sales volume by lowering prices, focus on adding value to your existing products or services. By enhancing the perceived value, you can justify higher prices and vastly improve profitability without needing to chase high sales volumes. Companies doing this are less ‘busy’, they can even have lower revenues, but can be more profitable.
Also, educate your customers. One effective way to alleviate the fear of losing customers is to educate them on the true value you provide. They may well not know this. If customers understand the full range of benefits they receive - such as better quality, superior customer service, or exclusive features - they’ll be more willing to pay higher prices.
Finally, you can test incremental price increases. Companies sometimes gradually raise their prices in small increments to see how customers react. You might be surprised to find that a modest price increase doesn’t affect your sales volume, allowing you to improve your finances with minimal risk.
3. Irregular Pricing Reviews
Pricing is not a “set it and forget it” decision, but many SMEs fall into the trap of only reviewing their prices once a year—or even less frequently. When pricing is neglected, businesses miss opportunities to adjust for changes in the market, inflation, cost increases, or shifts in customer demand.
Pricing should be a regular, dynamic process. Many companies that fail to revisit their pricing regularly find themselves stuck with outdated price points that don’t reflect the true value of their products or the current market environment.
How to Overcome This:
Make pricing a frequent topic for review. I recommend making pricing a standing item on the agenda at board meetings. This ensures that the topic is revisited regularly and that decisions about pricing are informed by up-to-date market data and business performance. By embedding pricing into your business processes, you can make informed adjustments as needed.
Remember to analyse competitor pricing strategies regularly and compare them to your own. Are they adjusting prices more frequently? Are there new players in the market offering lower (or higher) prices? Understanding the competitive landscape can help you make better pricing decisions.
Also, using your accounting function to track cost increases and inflation. Rising costs and inflation can erode profit margins over time. Make sure you’re tracking these factors and adjusting your prices accordingly. Waiting too long to raise prices in response to cost increases can lead to shrinking margins and cash flow problems that slow down investment.
Finally, utilise data and metrics. Your systems should track key metrics related to pricing, such as profit margins, customer conversion rates, and customer acquisition costs. By using data to guide your pricing strategy, you can make decisions based on concrete evidence rather than assumptions or outdated information.
Conclusion
Research shows that, on average, a 1% increase in price yields an 11% increase in profits for companies, enabling much higher reinvestment to drive growth. Pricing is therefore one of the most important levers SMEs can ‘pull’ to drive profitability and growth, yet it’s an area where many businesses struggle. The fear of losing sales, a lack of confidence in the value proposition, and neglecting regular price reviews are common obstacles preventing SMEs from setting prices that reflect the true value of their products or services.
By focusing on refining your value proposition, segmenting your customers, using experiments and revisiting pricing regularly, you can overcome these challenges and ensure that your pricing supports the long-term health and growth of your business. Remember, pricing is not just about covering costs—it’s about positioning your business for success.
Professor David Falzani MBE has trained over 2,000 growth companies, leveraging his experiences as an entrepreneur, business consultant and Professor at Nottingham University Business School. His book, “Double Your Price: The Strategy and Tactics of Smart Pricing”, won the Sales and Marketing category in the 2024 Business Book Awards.