In July 2011 I wrote a column about pricing your product or service. Pricing persists as an issue raised by many of our SCORE clients, so the subject needs revisiting.
A fundamental tenet of pricing is that prices must be established that allow the business owner to realize a profit after all expenses are paid. In many retail businesses, loss leaders may be part of the product mix, but rest assured the balance of the items must carry prices that will allow the business to offset the loss leaders. The thinking is to "get them in the door" and sell customers sufficient number of higher-margin items to the required return.
Setting a pricing strategy depends on many things, including the type of product or service you're offering, your own costs to provide it, your expected profit, your customers' location and the "going rate" for your industry.
There is a strong inclination when starting a business to offer a below-market price to attract customers. Specials deals can work in some cases to get the business off the ground, but going low is not usually the best approach. There are many price buyers, but rarely will the price buyer become a repeat customer unless you retain a low-price strategy. They are the buyers most likely to abandon you the moment they find something even less expensive elsewhere.
Excessively low pricing levels are even more dangerous for service businesses. You have only so many hours to sell. You can't compensate with volume. You're not like a retailer, who can still profit from lower prices if additional volume is generated.
We ask our clients several questions about their current pricing strategy:
Are you currently generating a profit?
What is your return on sales?
What are your operating, material and overhead costs?
Do you have waste and warranty claims?
What is your competition charging?
Do you have a distinctive advantage versus your competition?
Have you tried increasing your prices? If so, what was the result?
Pricing is partly psychological. Perceived product quality, service response time, immediate resolution of issues and a friendly place to do business are examples of factors that influence prices customers are willing to pay.
An upscale image may enable you to be in a premium neighborhood. You will want to set your levels according to the perception of your product or service "brand." Pay attention to price points. They differ widely by product and industry.
Pricing for many products and services are readily available on the Internet. Your customers will likely have done some comparative shopping on the Internet, so you too need to keep informed.
Test your pricing periodically. Pricing is an ongoing process. You may need to adapt to changing conditions. Competitors' prices, your own costs, customer perceptions and your profit expectations can all change.
A worthwhile source of pricing information is your suppliers. They are aware of what your competition is doing, and they are anxious for your success to enhance their sales to you.
Make sure you use timely and accurate information to calculate your costs for labor, supplies, direct and indirect costs, and overhead for every product or service you offer.
If your business includes many products, calculate the costs for each. Direct and indirect costs and your overhead will likely be different for each product. "Guesstimates" are not good enough. They may cost you far more than the hour or two of research.