Pricing is one of the biggest challenges for small business owners. When people decided to do business with you it’s typically based on six factors: like, know and trust and is your product or service cheaper, better or faster. If you ask people to pay too much for your product or service and they could stop buying. If you ask people to pay too little they might not respect you or think you know what you are doing. Pricing a service can be tougher than pricing a product. You don’t want to trade hours for dollars, you want to establish value-based pricing. Alan Weiss, best selling author of Million Dollar Consulting said, ”Set your price based on what is it worth to them if you solve the problem.” Getting the price right means valuing your time and expertise and build a brand reputation that accurately sways your customer’s perception of your value.
Profit is how we we keep score in business. If you are not tracking your profit margin, you could have an expensive hobby and not a business. An “optimum price” factors in all your costs (Materials/Time + Labor + Overhead= Your Price) Lets consider these factors before naming your price.
- Conduct market research: You need to find out how much customers will pay, as well as how much your competitors charge. Even if you believe that you are innovating the market with a new product, your customer is already buying from someone else to fit that need. Once you’ve done a competitive analysis, resist the urge to just charge what the other guy is charging. Price matching is dangerous, because you need to be sure to cover all your costs, including your profit margin. Professional consultants need to talk with your customer to see if you can learn how must they’ve invested in the past. They might tell you if you even want them as a customer.
- Develop your pricing strategy: Price sends a lot of messages and is used by customers and consumers to position your brand in their minds. Cost-plus pricing involves adding a mark-up percentage to costs; this will vary between products, businesses and sectors. Value-based pricing is determined by how much value your customers attach to your service or results.
Key questions to ask when developing your pricing strategy
- Who is your target audience?
- Are you creating a new sector?
- What product/service do your target customers currently use?
- What is your value proposition?
- Do customers value those advantages enough to change providers?
- Where will they be able to purchase your product or service?
- What do your competitors charge?
- What differences in value do you offer over the competition?
- Is the market growing or is the market saturated?
- Is purchase likely to be repeat or a one off?
- Do you need to offer a money-back guarantee?
- Set the price: Pricing is considered an art and a science, but there are specific strategies that can be used in the marketplace. Remember, just because you launch with one price doesn’t mean your stuck with that price forever. Here are a few pricing options.
Market Penetration-setting a low price to increase sales and market share;
Milking-setting an initial high price and a limited run and then slowly lowering the price to make the product available to a larger market, thus milking profits from the marketplace.
Exclusive-setting a premium price to reflect the exclusiveness of the product.
Cost-Plus Pricing-When you add a margin or mark-up to your break-even point.
Competition-setting a price in near your competitors.
Price Bundling-offering a group of products at a reduced price; this is common strategy for Black Friday and cyber Monday shopping deals.
Value-based Pricing-offering a price based on your reputation and results.
Psychological-considering the psychology of your price and your positioning within the market place such as charging $97 instead of $100 or $1,997 instead of $2,000. Using a 9 or 7 at the end of your pricing will help consumers emotionally feel like they are not really spending $100 or $2000.
Decide which approach is most suitable for your products or service before setting your price.
- Know your costs: Calculate alldirect costs including labor, product development, materials, inventory, packaging and so on – the more you make or sell, the higher these costs will be. Then you need to calculate what percentage of your indirect costs also known as overhead including rent, administrative, marketing and professional services such as legal and accounting will need to be factored into the price.
- Other factors affecting price: How will charging sales tax or shipping have an impact on price? Keep in mind shipping charges are the #1 reason for shopping cart abandonment online.
- Your pricing is fluid: Your pricing will need to change from time to time. You need to watch your industry trends, direct costs and your competitors, so you can keep up with the market place. Be sure to contact your customers by phone or email within 7-10 days to make sure that you are still over delivering and aware of any service gaps.
Don’t guess at pricing. You need to make sure you are making a profit and not just making sales. It’s not about what you make, it’s about what you keep. Remember, just because you set a price doesn’t mean it’s the price you’ll use forever. Review your pricing every 6 -12 months, to determine if it’s time to make a move.