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7 Tips on How to Set Prices for Products and Services

Pricing your products and services appropriately is one of the biggest hurdles in owning a small business. Understanding what your customers are willing and able to pay for is vital to ensuring your business is successful. 

Low prices don’t mean you’ll have customers lining up to buy. That can cause customers to assume your products or services are of low quality. High prices will discourage customers as well. You want to figure out what optimum price is attractive to your customer base while making a profit. Lock in your pricing strategy as soon as you can so your business can flourish as you gain repeat customers. 

There are many factors that come into play when pricing your products and services. Below are our seven tips on how to set your prices so you can accomplish your business goals. 

7 Tips on How to Set Your Prices

Be strategic when setting your prices and consider all the various factors.  

1. Understanding Your Costs and Gross Profits

Knowing your profit margin is vital when managing your finances. Your profit margin shows you how much of your revenue is your profit, not including business expenses. It will give you a clear understanding of how much you’ll make on the sale of a product or service. You should know what your margin goals are when you’re setting your prices. 

There is an easy way to figure out your gross profit margin. This is for the profit margin on a single item. Follow this formula to figure it out:

  • Take the retail price of a product
  • Subtract the cost of labor and materials needed to produce it
  • Divide that number by the retail price
  • Example: If you sell a product for $35 and it costs $30 to make it, the gross profit margin is 14% ($5 divided by $35)

By calculating the gross profit margin, you’re able to look at what products are underperforming and not priced correctly. As you grow your business, you can adjust prices accordingly. 

2. Conduct Market Research on Competitors

You don’t need to hire a marketing company to figure out your pricing approach. You can look at the marketplace and evaluate what other competing companies are doing. By studying what other companies are pricing similar products and services, you can see what the perceived worth is and what customers are willing to pay for it. 

The goal of market research isn’t to price your items lower or copy your competitors. It’s about figuring out what general area you should be working in. If you notice that the pricing structure you came up with before researching is quite different than your competitors, you need to evaluate why. Is it because you’re offering something different than other companies? Or are your prices just way off due to lack of research and preparation?

3. Research Your Customer Base

Additionally, you need to spend time researching your target demographics. A solid understanding of your customers and what they’re willing to pay will help you with your pricing strategy. 

You can send out emails to current customers with various promotions to gauge their interest. Look at your products’ target demographics to see if they’re price sensitive, what they usually buy, where they live, etc. Evaluate what type of customer you’re targeting and price accordingly from there. 

4. What’s the Minimum You Need to Stay Afloat?

Setting a price that is so low it bankrupts your company is not the route you want to take. You want to turn a profit while also keeping customers buying your products. The prices you set should make financial sense, and you should be bringing in enough revenue to break even. If you’re not, then you’ll want to rethink your pricing strategy. 

Keep in mind if the amount for you to break even is too high for the current market. You may need to rethink what you offer to make it financially viable for you and your customers. 

Figure out all your costs, which include:

  • Indirect business costs, such as wages, rent, utilities, etc.
  • Direct business costs for product production, including materials, equipment, packaging, etc.

This will give you a good foundation when figuring out what your minimum price should be per item. 

5. Determine the Perceived Value of Your Product

You may be trying to establish a price point for an item that’s currently on the market. You’ll need to consider what makes your product different than what’s already out there. 

For example, say you own a pizza restaurant, and you want to price your pizzas higher than a chain restaurant. Think about what sets you apart from the competition. Do you let customers hand-select what toppings go on their pizzas? Do you only use organic ingredients? If you offer something that customers will value, you will be able to price your items accordingly. 

6. Establish Your Business’s Goals

In addition to identifying what you want to make in profits for each product and service, you should also have a revenue target for your entire business. If you only sell one product, that’s easy. Estimate how many of those products you expect to sell during the entire year and divide your desired target revenue by that number. 

If you sell multiple products, you’ll need to set a specific amount of revenue for each product based on performance and price. You don’t want each individual product to succeed but your entire business as a whole. 

7. Test Out Your Prices

The best way to figure out if your price points will work for your business and your customers is to test them out. There is some risk involved, but you’ll be able to adjust your prices based on customers’ reactions and sales. Have a plan in place to pivot your strategy if things aren’t working well during this test period. 

One way to test is to price your product at a strategic price point at its launch. If it’s priced too high, it may be hard to gain traction. You can conduct A/B testing by pricing a product at different price points and seeing where you have the most success. 

Develop Your Pricing Strategy

Taking all these factors into consideration when setting your prices may be overwhelming. At the end of the day, you need to figure out what your goals are for your company. Your business should be successful, turn a profit, and continually bring in new customers.

Developing your pricing strategy is vital in ensuring your success and the happiness of your customers. Taking the time to price things out appropriately instead of assigning random prices to products will guarantee your business is fruitful and thrives. 

Do you have any other pricing tips? Drop a comment below! 

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