Understand your product’s price elasticity 

Price elasticity is a measure of how much a price change would affect the demand for your product or service.  Key questions to answer to determine your product’s price elasticity include:  

• At what price would consumers begin to think product is too expensive to consider purchasing? 
• At what price would consumers begin to think product is too expensive to consider purchasing? 
• At what price would they begin to think product is getting expensive, but you still might consider it? 
• At what price would they think your product is a bargain—a great buy for the money? 

Answering these questions requires a thorough understanding of SMB consumers. 

Look at your product’s performance and beyond 

Here are other strategic factors to consider when it’s time for a price strategy meeting:  

• When reviewing your product’s performance over a period of time, is the current price contributing positively or negatively to your sales? 
• Is your average price consistent with your perception of value? 
• What opportunities can you offer in terms of tiered pricing to appeal to different shoppers? 
• Which competitors could your consumers purchase from if they’re not convinced by your price point? How does your competitor’s pricing compare to your own? 

Determine your strategy 

Deciding which strategy is right for your brand is one of the biggest challenges for small and medium-sized businesses when it comes to price.  

The fact is that no single pricing strategy will generate a profit in all situations. Situations can vary from “gift-giving season” to an impending recession. Being profitable requires multiple strategies for every product, product size, pack size, elasticity, competitor pricing, and more. 

Here are the 5 most common CPG pricing strategies and some pros and cons of each: 

Cost-based pricing: This approach considers the whole pricing package, where you calculate your production costs for a product and then add a pre-determined markup for the sales prices.  

• Pros: This lets you recoup your costs and ensure a profit for each product you sell.  
• Cons: This strategy doesn’t account for the competition or consumer demand trends. This means you may have trouble keeping up with shifts in the market. It also requires you to maintain stable production costs because an increase will either eat into your sales price or force you to increase prices and risk upsetting customers. 

Competitive pricing:  Another popular model, competitive pricing is exactly what it sounds like. You look at your biggest competitors, see their prices, and try to match or undercut them.  

• Pros: This model works well for industries with less variation between product cost and quality.  
• Cons: If your overhead costs are higher than the competition, you’ll quickly eat into your profits and risk defeating yourself with this model. 

Penetration pricing:  If you’re in a highly competitive market, this is a great model to use. Penetration pricing involves launching products at a low price to spark interest and then raising prices once you’ve built demand.  

• Pros: Many of today’s giants won over the market by employing this strategy 
• Cons: This model requires you to have the capital to sustain smaller margins while interest builds and the ability to build enough loyalty that consumers will stay after you raise your prices. 
• Penetration pricing:  If you’re in a highly competitive market, this is a great model to use. Penetration pricing involves launching products at a low price to spark interest and then raising prices once you’ve built demand.  

Value-based pricing: Sometimes called demand-based pricing, this model involves using research into consumer demand to set pricing that matches their needs. The value in the model comes from knowing what consumers are willing to pay and meeting them at this price. 

• Pros: If this price gets you a decent profit, it can be highly lucrative.  

• Cons: This strategy does require a good retail data analytics tool that gives insight into demand trends, consumer behaviors, and shifts in the market. This can be easily counteracted with the right data partner at your side. 

Price skimming: Sitting on the other side of the spectrum of penetration pricing, price skimming involves launching products at a high price and then raising it once competition enters the market.  

• Pros: This is generally reserved for products that establish a new market or where the current competition is too weak in quality or demand to be a threat.  
• Cons: It can be a risky model if consumers see your products as overpriced or if competitors can undercut you and gain market share. 

Each strategy has its own pros and cons, so it is important to experiment and pick the one that works for your business.  

 What to watch out for when it comes to your pricing strategy 

• Look  to  the competition: Paying attention to your competition’s pricing models and their level of success can help you better understand the market and consumer trends. Despite some consumers claiming brand loyalty, recession is at play and sentiments could change.  
• Avoid pricing wars:  It’s valuable to know what the competition is doing, but beware of price-based competition.  It typically leads to both brands undercutting themselves,  missing out on profits, and possibly diminish perception of brand value. Instead, use competitors as a benchmark and seek to differentiate your offerings and maximize sales.