A Guide to Price Optimization for Small Businesses

Sade makes handmade bags and spends about #5,000 on making a single bag, which she sells for #8,000. However, with the increase in costs of things, she now spends #7,000 on making that same bag, meaning an increase in cost of production, which now requires an immediate increase in price.

However, she is unsure how to do this well, so as not to make a pricing mistake and scare customers away. This is where price optimization then comes in.

By the end of this article, you will understand what price optimization is, factors to consider when optimizing your price, and a step-by-step approach to price optimization.

Let’s dig in!

What is Price Optimization?

Price optimization refers to finding the best price for your product/service, which would yield optimal sales and profits.

The price optimization process requires more than just setting a price that you feel would bring more profits to your business. To succeed, you must carry out adequate market and customer research to back up your decisions.

Factors to Consider when Optimizing Price for Your Product/Service

There are core factors to consider when optimizing your prices to not scare customers away, whilst making a profit. Let's examine them below.

1. Customer Behaviour

One of the factors that would make or mar your pricing is the behaviour of your customers towards your products. It has to do with how they buy your products, how they use them, the product’s importance in their daily lives, and whether they continue to buy them.

So, seek to understand your customers and their buying behaviour. Analyzing this is key to helping you make better decisions when optimizing your price.

2. Customers Segmentation

Segment your customers based on their demographics and psychographics. As a business owner, you must not make the mistake of thinking that all your customers are similar, even though you are targeting a single audience type. This is why knowing your audience is key.

Information about customers' demographics such as age, gender, income level, educational level, marital status, etc. should be checked. And information on their psychographics, such as values, interests, lifestyle choices, etc. also need to be assessed.

3. Customer Purchase History

Another important factor to consider when optimizing your price is the purchase history of your customers.

This involves information on the number of orders customers have placed in the past, items purchased, how much each order costs, when they made the orders, etc. This would also help you optimize your price well.

Related: 6 Pricing strategies to make your customers buy more

4. Price Elasticity of Demand

This has to do with the ratio of the percentage change in quantity demanded of a product to the percentage change in price.

This refers to how a change in price influences the quantity of products demanded. This is key to examine when optimizing your product's price.

5. Competitor Analysis

If you are not running a monopoly; then it would be wise to assess competitor’s pricing strategies when optimizing your price.

This will help you know what others are doing to cushion the rise in production costs, or how much they are adding to their prices to enable you to make the right decision when optimizing yours.

Step-by-Step Approach to Price Optimization

With the following steps, you would optimize your price smartly, while getting the best returns from the decision. Let’s get to them.

Step 1: Dig into data

The first step to take in price optimization is to dig into the data obtained from the research done above.

This would arm you with adequate and correct information to make the right decisions. For example, data gotten from the research done on customers can help you predict their reactions beforehand to the new development.

Must read: 6 Steps to tracking business expenses

Step 2: Define goals

After analyzing available data, the next step is to define the goals you aim to achieve with the price optimization exercise. This would help you clearly map out the things to be done to achieve the goals.

Now, beyond profit making, there are other core reasons to do a price optimization. This could be to attract new customers, upsell existing customers, etc. So, identify why you want to optimize your price and map out the strategies to use in achieving it.

Step 3: Identify your value metric

Your value metric refers to the way you measure the per-unit value of your product. It is an important aspect of price optimization to pay attention to.

When optimizing prices, assess the value of your product, to determine what it is worth charging for. To do this, look at the solution that your product solves, and how it makes the lives of your customers easy. This will make you more confident when increasing prices.

Related: Cash flow problems faced by businesses and how to fix them

Step 4: Create and test various pricing tiers

The next step is to create various pricing tiers, based on the information gathered about your target audience and your value metric. Now, each pricing tier you create should align with each segment of your audience, to ensure that you are serving each member of your target audience at their paying capacity.

Also, if your product cannot be priced in tiers, you can create bundled packages. This ensures that the price is well optimized, to achieve your price optimization goals, as well as satisfy your target audience.

Step 5: Monitor Price Performance

After setting the new price and creating tiers and bundles, your price optimization work is not still done. You still need to observe how the pricing performs, and how receptive your customers are to the change. This helps you measure your business’ growth, and how your price affects it

However, do not change prices too frequently, to not scare customers from your business.

Getting the best out of Price Optimization

Pricing is an ongoing process that never ends. So, as you go on in business, analyze your pricing from time to time, to see if it is fitting for the value of your product.

You must also perform in-depth research on your target audience, value metric, and competitor; ensuring that your decision is backed by research.

At Triift Africa, we help small business owners start and grow their businesses with access to funding and business resources.

Do you have issues with your pricing model and with making profits with your current price? Send a message to us at hello@triift.com or visit our website for a consultation.