It’s one of the most basic, yet most elusive questions asked in all types of businesses. Of course you want to make money, but you also want to set prices at a reasonable rate so that you will not lose business. So how do you strike that balance? How do you calculate pricing for products and services offered through your business? How do you determine a rate that is right for all involved?
The first thing to remember when setting prices for goods and services is that you are in business to turn a profit – not just to be a nice guy or girl, but to make money. If you do not set your prices at a rate that allows for profitability after expenses, you do not have a profitable, sustainable, business, and success in small business will always be unachievable. If you’ve set the bar too low, you’ll be out of business within months.
Clients and Customers Second
Naturally you cannot completely ignore your clientele and customer base when setting your prices. Whomever your target audience is, your prices must reflect a cost that can be supported by that market segment. However, if you do your research and give value for the money, you should have arrived at a cost sustainable by your group.
Tips for Setting the Pricing Bar
Let’s take a look at the actual process of setting prices for products and services. Use these tips and market factors to help you arrive at a competitive pricing structure.
- First, research the competition. Get a clear view on the prices they are charging, and where your offerings can fit in along the spectrum. Use averages as a basis, and adjust up and down according to additional or lesser value (based on factors such as those following).
- Decide how to charge. Are you looking for an hourly rate or a project-based rate? Is it a unit or wholesale price you are offering? Evaluate your product, experience or skills. In service-based industries, generally speaking, an increase in experience equates to a higher fee for service.
- Account for all variables. If there is something your product offers that another doesn’t, increase to reflect the value. If there are additional costs involved for shipping, marketing and so on, add those in too. For service-based businesses, consider all the small variables that might impact pricing. If you offer additional services, compensate for them. If clients expect add-ons, build a fee structure that allows you to recoup revenue.
- Allow for overheads. Determine how much of your business’ overheads must be supported by individual sales. Build that fractional amount into your pricing.
- Build in profit. After carefully evaluating the competition and all expenses, set a base price and then build a profit-margin into it. Determine how much profit you will be satisfied with and set your price accordingly.
Justification through Value
The one factor to always keep at the forefront of pricing is value. To be clear here, this is not about justifying your price. Your price will be justified if you have set prices fairly, based on the true value of your goods or services. Focus on the value you deliver, set a reasonable, sustainable fee, and be confident that you have served the greater good of all involved.