Pricing is one of the most challenging aspects of running a small business. It’s also one of the most important. Do it correctly, and you maximize your profits. Do it wrong, and you minimize your chances for success. Here are five pricing mistakes small businesses should avoid.

1. Making pricing an afterthought

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You’re in business to make money, right? Pricing directly determines how much profit your business will make. Pricing should be a central part of your product development process.

2. Using a formula

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Life would be great if pricing could be reduced to a a simple “(X+Y) – Z = Profit” formula. But, unless you are a Ph.D in math, creating formulas that take into consideration what the competitor across the street will do to react to your price, chances are you should simplify the process. Think strategically about pricing—use the formula as a starting point and factor in perceived value, economic conditions and so on before putting it on the price tag. Remember your pricing should always be adaptable to the unforeseeable.

3. Ignoring the hidden costs

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It’s important to keep track of all of your costs no matter how minor. Small and hidden costs have a bad habit of adding up over time into a significant sum that will subtract from your bottom line.

4. Giving all customers the same price

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No two customers are the same—their needs and expectations are as different as their reasons for doing business with you. Factor that into your business by using tiered pricing—charging more for faster services or premium-quality products. Charging less for volume purchases or longterm commitments (for instance, a discount over a monthly rate when purchased by the year).

5. Compete with bigger companies on value, not price

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Competing on price is difficult for a small business. Big companies have so much volume business they can afford to make less money for the same product, so they will almost always beat out the little guy on price. So do what small businesses can do best: Offer services or other incentives that create value the big guys can’t match. Even something as small as knowing your customers’ names and anticipating their needs can swing the advantage your way.

 (Featured Image: on Flickr via CarbonNYC)