by Don Taylor

Finding the best price for products and services is a problem that every business owner deals with. Prices are too high? You may lose potential sales or customers. Prices too low? You may not generate enough profit to stay in business.

Most owners use cost-plus or cost-based pricing strategies, two easy methods that require minimal effort and information to use.

The main problem with cost-based pricing is that it ignores the competition as well as the customer's willingness to pay. Cost-based pricing is inflexible and usually won't allow you to maximize your return on investment. It also can limit your ability to capture additional market share when conditions are favorable.

I often work with business owners whose competitors have lowered prices to gain market share. The typical response, reducing prices to match the competition, often triggers a price war and everyone gives up profit. While the customer may benefit in the short term, prices bounce back up when the least efficient price cutter goes out of business.

Competition is healthy. However, you should base your competitive strategies on giving the customer the best value, not just the lowest price.

Which reminds me of a story. Bill, a well-established barber-shop owner, charged $12 for haircuts. Bill was a talented barber who did quality work, and his business was healthy and growing.

One day a fresh barber-school graduate opened a shop next door. The new kid immediately put up a huge sign that read, "Haircuts - $6."

Bill had a decision to make. Should he lower his price and match the new competition or hold his price and risk losing good customers?

Bill knew if he lowered his price his income would shrink. He also knew that to do nothing could mean losing customers and revenue. So he took swift action. He erected a sign that proclaimed in big, bold letters, "We Fix $6 Haircuts."

The point is, you don't have to compete on price, but you do need a strategy to stay in business when faced with low-price competitors.

There are five things to consider as you create a pricing strategy. First, consider your product or service. If your offering has little uniqueness, price it close to your competitors.

Second, consider the customer you're trying to reach. Low prices may increase traffic, but these customers will likely be less loyal and will give you less profit.

Third, your pricing should reflect the demand for your product or service. Can't keep up with demand? Your prices are probably too low.

Fourth, consider the turn rate of your products. Slow-moving items justify higher markups. Faster-turning goods can produce a good return with lower margins.

And finally, make every effort to reduce costs. When you become the low-cost provider, you can pass the savings along to your customers.

If you feel you need to make some pricing changes, here are some tips:

• Raise prices when you have more business than you can handle.
• Raise prices when your prices are significantly lower than your competitors. Don't leave potential profit on the table.
• Raise prices when your sales are increasing, but your margins or profits are decreasing.
• Raise prices when you add value to present offerings. Value is added by improving quality, increasing services or becoming more convenient.
• Raise your prices if you have little competition. But don't get carried away - you may invite competition.
• Raise prices when your product or service is unique or customized.
• Raise your prices when your product is durable and will give your customer years of useful service.
• Raise your prices when you have nothing to lose. If you are at risk of losing your business anyway, raising your price won't hurt.
• Lower your prices if new lower-priced competitors constantly enter your market. Trim costs and reduce expenses to maintain a profit.
• Lower your prices if you're trying to enter a new market with a "me too" product or service.
• Lower your prices if you need to gain market share. If your goal is to grab a quick chunk of market, low prices can help.
• Lower your prices if your costs decrease. When you benefit from better buying or other savings, pass the savings on to your customers.
• Lower prices on fast-moving items that will stimulate customer traffic and sales of other products and services that carry better margins.
• Lower prices on "value packages" that increase your average sale. (The fast-food industry is notorious for using this technique in their "value-meal" offerings.)

The key to making price adjustments is to understand how small price changes can impact your bottom line. Your adjustments can improve your value position if you stay close to your customers, watch your competition carefully and make small changes frequently.