The age-old question for small-business owners is: How much do I charge for my products or services? Unfortunately, there is no easy answer, but following certain fundamental principles may help.

First and foremost, be aware that the lowest price is not always the best price. One or more larger companies with greater resources than you have may be able to outlast your firm if you compete on price alone. You may find that the bids you do win are not profitable enough to sustain your business over the long haul. Eventually, your company could be swallowed up or go under.

Instead of trying to lowball the competition, consider these factors:

  • Competitive analysis:Look beyond the pricing of other companies in your area. Are they targeting a specific segment of the market? Do they include any value-added services? How are they distinguished from your company and vice versa?
  • Ceiling price:This is the highest price that the market will bear. Based on feedback from customers and industry data, determine what your ceiling is. Depending on the circumstances, the current highest price may not be the ceiling price.
  • Elasticity:Depending on the elasticity of demand for your products or services, you may be able to maintain a higher ceiling on prices. This reflects a limited number of competitors, the perception of quality and whether consumers are accustomed to seeking the lowest price for offerings in your industry.

Generally, you will not have to live and die with the lowest prices, unless you are drawn into a “price war.” As the name implies, a price war can be extremely combative and result in business casualties. The problem starts when you or a competitor lowers prices to grab a larger market share. A price war can escalate into a series of price reductions.

It is easy to say one should not get caught up in a price war, but reality may dictate otherwise. At least you may minimize the likelihood if you take these three steps:

  1. Emphasize exclusivity. Relying on products or services exclusive to your company may provide protection from reduced prices.
  2. Trim your product line. You may provide products or services that require a high level of customer service and maintenance. Cut back on lines that are not generating a large profit. Find out what the customers really want.
  3. Develop your “brand.” Try to be unique to stand out from the competition. If there is a price war, a strong brand can help you survive.

Finally, leave the steep price-cutting to the corporate giants. A small business with reasonable pricing strategies can escape the pitfalls of rock-bottom pricing. Try to stay above the price war fray.