One of the most important decisions to be made when you start a business is the pricing of your products or services.
Customers buying standard products that are available from numerous sources will look for the supplier with the cheapest prices.
This makes it difficult, if not impossible, for the small firm to compete with major suppliers who have the advantage of bulk purchasing or mass production.
Fortunately, there are niches you can occupy where price is not the most significant consideration, being outweighed in the eyes of the customer by quality, service or uniqueness.
“Small companies often make the mistake of charging very low prices because they feel they must compete on a price-only basis,” warns marketing consultant Annmarie Hanlon.
“But there will always be a large company that can afford to drop its prices to squeeze the small company out. Instead, you should compete on product or service quality. A small company can give an attention to detail which is difficult for a big company dealing with 20,000 customers.”
Having spent five years as a director of the Prince’s Youth Business Trust, Hanlon speaks from the experience of being midwife at the birth of numerous businesses.
She says: “There is less confidence in a cheap service than in a more expensive one. Hairdressing is a good example, where there is an idea that if you are paying your hairdresser more you are getting a better hair-do.
"I know a hairdresser in the Midlands who charges more than anybody else in the area. Customers receive a welcoming neck and shoulder massage on arrival and are given a hot towel to wipe their hands.
"With these added attentions, a premium price is perceived as appropriate.”
Location and environment
Hanlon points out that location and environment are also important.
“If an establishment in a back street and with no reception area charged the same prices as a lush Mayfair location, its customers would feel they were being ripped off. It’s all about ensuring the price is appropriate for the service.”
This is illustrated by what she calls “the salmon sandwich issue”. She explains: “If you buy a salmon sandwich from your local sandwich shop to take away in a paper bag you are happy with a price of £1.
"If you go to a well known department store the sandwich is nicely packaged and you have a perception that the quality is better, so £1.50 might be acceptable.
"Then there might be a premium product with finest Scottish smoked salmon and delicious trimmings. For that you might well accept a price of £2.10 because you think it is right for what is being offered.
"If the same £2.10 sandwich was being sold for 45p you would wonder what was wrong with it.”
Offer a specialised service
In the retail sector, specialisation can sidestep price competition. Offer a wide selection in a narrow field. Observe what is lacking in an area and not encompassed by the big chains.
It's a matter of finding a demand in your area that's not catered for, where your customers will feel they are getting value for money as opposed to cut prices.
Family convenience stores that buy from middlemen – wholesalers and cash & carries – cannot match the prices of supermarkets which buy in vast quantities direct from manufacturers. But their strength can be their location.
It may be a type of giftware, outsize clothes, bicycles with a repair service, electrical tool hire… It’s a matter of finding a demand in your area that’s not catered for, where your customers will feel they are getting value-for-money as opposed to cut prices.
They normally serve a localised market, such as a housing estate, or they may be situated on a route used by people going to and from work. Open for long hours, they are handy for people calling in for newspapers, confectionery or snack foods, or an ‘emergency’ purchase such as milk or sugar, aspirin or cigarettes – items that do not justify a trip to the supermarket.
People who call in for just one item often make impulse purchases of others. It’s a case of convenience outweighing cost.