A reader from Ontario posed a question to me that stopped me in my tracks. They asked me to help them come up with a “formula” for assisting them in pricing their products and services. While the request sounded simple enough I found myself re-examining the methods that are used by businesses old and new alike to set prices for their products and services.
Pricing is an area that is often neglected by entrepreneurs because they simply don’t understand the concepts associated with this extremely important business function. Many business owners simply take the cost of their product or the cost of providing the service and arbitrarily multiply that number with the logic that an appropriate level of profit will be produced. The real results of this method relating to your businesses profit will most likely be just as arbitrary.
So with the assistance of our friends at Entrepreneur Magazine, I have condensed into point form the things they suggest that you should consider when Pricing your product or service.
- All Prices Must Cover Costs – I know this should be easy right? In most cases this isn’t difficult but when I say cover costs, I mean cover all What I mean by this is you have direct costs (how much the product costs to make or service to deliver) and indirect costs (overhead such as rent, utilities, staff wages, phones, marketing etc.) so that you can make a profit for the entire operation.
- Prices Must Be Established to Assure Sales – Do not just price to another competitor’s price or think that by being “cheaper” than everyone else that you will win all of the business. Think of the user benefit or value that you bring to your customer. Your business is going to succeed because you offer your customers benefits not because you are the cheapest in town. The secret of pricing? Test, test ,test. Try different pricing in isolated geographic areas and start high as you enter the market. You can always come down later.
- Ask for Feedback from Your Customer – Is my product faster, cleaner, smaller or more user friendly? Ask for serious feedback from your product. Being too cheap can be as serious as being too expensive. If you plan on selling through a channel or a reseller network, you need to hear from them as well. A new product will require good margins for your resellers as well. Selling direct to the customer might save having a reseller but you may soon discover that you need higher pricing in order to cover unanticipated costs like the dollar fluctuations, shipping and any product changes before going into mass production.
- Your Prices Aren’t Etched in Stone – Don’t make the mistake that your prices are never going to change once you have set them. They will. Just because you went through all of this work to arrive at a price that means you can’t simply forget about it. This is a mistake that many entrepreneurs commit. Because pricing is so important and can be so confusing, many entrepreneurs set prices and “hope for the best.” What this does to their business is they resign themselves to lost profits. Or worse, they are putting profits directly into the pockets of their competitors. This means that you must check pricing continuously.
Covering your costs is important, but as you can see it is only one aspect of pricing. Thoroughly examining your market as well as truly understanding how your customer looks at your product or service will go a long way in determining the best price for your product.