One of the hardest, yet most important tasks a small business owner has to do is price their offerings. If you price them right, you will have more sales that are profitable and stick. If you price wrong, you may attract the wrong buyers and experience more compliants. It’s one of the toughest choices to make, but one of the most important. Pricing right takes time, research, and guts. Pricing matters more than almost anything else.
While you have a lot of flexibility in how you choose your prices, it’s important to know who your target audience is, and what your objective is when setting prices. Do you want to be the cost leader, or the quality leader? What kind of pricing does your target audience expect? Will you be attracting the wrong audience with lower or higher prices?
There are formulas that you can use when pricing products and services, but it’s more important to price based on what you’re trying to accomplish with a particular audience.
If you under-price your products or services, you could impact your bottom line in ways you haven’t yet imagined. By under-pricing, you may send the message that your products or services are cheap. If you lessen the perceived value of your work by under-pricing it, you are setting a precedent for a long time to come that could be hard to escape from. It is not always a good idea to be the cost leader, even in a down economy.
If you over-price, you may set your customers up to expect more than you have to offer. Also, by over-pricing you can price yourself right out of your own market and sales will suffer tremendously. That’s why it’s imperative that you understand your target audience intimately to know what they can afford to pay. If you can figure out what your customers think is a fair price for your work, you’ll make more for every product or service you put out.
The factors to consider when pricing a new product or service are:
* Cost – How much did the product cost you to make or produce?
* Competition – How much is your competition selling a similar product or service for?
* Revenue – How much money do you need to earn to keep your doors open?
* Volume – How many can you sell? If it’s a service, you’ll be able to physically sell less than if it’s a product.
By keeping these four factors in mind you should be able to come up with a reasonable price structure for your products and/or services. What’s more, you should periodically review your pricing structure to determine if changes need to be made. As costs go up, your prices will also need to be adjusted upwards if you cannot lower costs.
Finally, keep testing new and different pricing structures and product offerings. If you can group products differently, add in a bonus offering and get a higher price, by all means do so. By staying on top of your pricing structure and understanding where your market is headed, you’ll beat the pricing game and see a better return on investment.