Many entrepreneurs in the planning stages of launching a business struggle with determining how to price their products and services. In fact many entrepreneurs go into panic mode furiously stalking their competitors and opting to undercut them on pricing instead of the better option of setting pricing based on value.
So how does one go about properly pricing their products and services?
Well there are 6 factors to consider and having a complete understanding of each will help you to eliminate any questions surrounding your pricing.
# 1 – Economics of One Unit
Simply put you need to know what it costs you to produce one unit of (insert your product name here). If you sell cupcakes you should have a full understanding of what it costs you to make one cupcake.
How much do you pay for flour, sugar, eggs, milk, chocolate, sprinkles, cupcake packaging, etc.?
How much does that yield? Let's say 1 package of flour and sugar, 1 carton of eggs, 1 gallon of milk etc. will allow you to make 100 cupcakes.
Take the cost (for example $ 20) and divide it by the number it yields (100) to get your cost per unit ($ 0.20)
So if it costs you 20 cents to make one cupcake this is the base number in which you use to determine pricing.
# 2 – Associated Costs
So it's not as cut and dry as producing a cupcake for $ 0.20 and selling it for $ 1.00 to make $ 0.80 profit per cupcake. You also need to know what your associated costs are such as renting the commercial kitchen, advertising, employee wages, marketing, your salary etc. and use those numbers to determine how many cupcakes you need to sell each month to cover expenses (and make a profit).
# 3 – Competitor Pricing
Do not panic. Yes, you want to have at the bare minimum, an idea of what your competitors are charging But it does not mean you have to compete on price or Heaven forbid (gasp) charge lower than your competitors.
In fact for most businesses it's not recommended you compete on price. Instead conduct research on your competition to determine where you stand out and what makes you different.
Perhaps you have a streamlined process or you use organic ingredients or you offer delivery or you have an online ordering system. Whatever it is, find the areas in which you surpass the competition and use it to justify your pricing.
# 4 – Quality of the Goods
Having a high-quality product or service goes without saying. Even if you justify charging more for your products or services, if the quality is no good you will be inundated with returns, complaints, and the worst of the worst – negative reviews on social media.
If you are unsure if the quality is any good the one way to determine this is to sell a few units and ask for feedback. This does not, I repeat, this does not mean to sell something to your Mom or other loved one who is:
1. Not your target market and
2. Too attached to you personally to give you constructive feedback.
# 5 – Benefits to the Consumer
The benefits a consumer can expect to receive as a result of purchasing from your company must be clear and measurable. Having a good understanding of what your customers pain points are and how your products or services are the perfect solution can go a very long way in helping you to set pricing.
Take my company for example, when is the last time you woke up in a cold-sweat thinking “OMG! I need some market research like now !!” I'm guessing not ever.
You see I understand that my clients are not looking for market research , they want validation that they have a good idea for a business and that before they invest countless dollars and hours to bringing the business to the marketplace they really do have a chance at being successful.
So the market research data I provide gives them peace of mind. And really what price can you put on that?
# 6 – Confidence
Confidence could almost be the only factor listed because this is where I see entrepreneurs struggle the most. You doubt yourself, you doubt your abilities, you doubt whether or not what your selling is good enough, etc.
With all of that doubted piled up you then start reducing your fees until you find yourself almost giving away your products or services for free. Now you are not making enough to cover your expenses and you are starting to resent your business and not long after that you close up shop and head back to (cringe, gasp, shout, cry) a job.
Determining how to price the products and services for your small business is as much an art as it is a science. In the beginning it will take some market research and a little bit of trial and error and by considering these six factors you will be in a much better position to get it right sooner.