Determining the right prices for your products or services can make or break your business. If your prices are set correctly it can increase the amount you sell, creating the foundation for your business to be successful! That being said, there isn’t one winning formula that proves lucrative for all business types, but there are ways to help you gauge what’s best for your small business.
First, let’s address the two most common mistakes business owners make when setting their prices:
Under-pricing can work short term, but it is not effective or sustainable for your small business in the long term. Furthermore, it’s not a good idea to sell your offering short. If you have a good product or service but you are selling it for too little, it can give customers the perception that they are getting something low value, which can drive away customers to your competitors.
This mistake is often done by new business owners launching their offering for the first time and anxious to cover all start-up expenses as quickly as possible. On the other hand, pricing beyond what your customers are willing to pay will also drive away sales.
Factors to take into account when determining your pricing strategy:
There are many different formulas out there to help businesses determine their right pricing strategy, most of them you’ve likely encountered before. But first, you need to consider pertinent factors and use those in conjunction with these formulas to help you make the best decision for you business:
- Know your local competition
Be aware of the physical shop fronts in your area that you are in competition with. If they have a similar offering to you, what is their pricing like? You should also examine what additional services are included in the price they have set. These two factors combined should give you a starting point to get your pricing in the right ballpark.
- Understand the online market
Conduct some online research to determine who is popular online that is doing the same thing as you and look at their prices. Again, take into consideration the add-ons that are provided to help you put the price in context.
With both these points it is also necessary to understand how your competitors’ products (whether they are sold online or offline) compare to your offering and what the resulting impact should be on your pricing strategy. For example, if you sell luxury coffee, the prices for budget coffee can offer a starting point to help you determine your prices, but because they are lower quality, you should charge higher prices because your products are better and your price should reflect that.
- Know your target audience
If you’ve gotten to the pricing stage of developing your business, you should have already thought about who you want to sell your products or services to. Are these people price sensitive or willing to pay luxury, high-end prices? Who you are targeting to buy from you determines what is appropriate to charge.
- Factor in your expenses
The most important thing to remember, and the reason you are running a business, is that you want to make a profit.
Therefore you have to be aware of monthly costs in terms of: the product/service cost to your company; other expenses, such as rent, wages, utilities; money to invest in the business (ie. new equipment and expansion). Then use these factors to determine how much to mark-up the product or service and how many you have to sell each month to achieve profit. Don’t expect to make a profit off of every single sale – this will lead to over-pricing!
- Calculate your revenue
You should also have an idea of your monthly revenue goal (if you don’t, start thinking now). Again, it is important to remember that your business exists to make money, but also keep in mind that this needs to be a realistic figure. Then factor this in to the pricing strategy you want to use to get an accurate price.
Evaluating the above factors will give you a good starting point in determining the best pricing strategy for your business. Find the balance between these factors and then constantly re-evaluate and rework your pricing strategy as your expenses change or new competitors enter your market.
And lastly, as always, once you’ve worked out the optimum pricing strategy, make sure you get the word out about your fantastic offering at the perfect price and get selling!