Pricing your work is one of the most challenging things to do as a small business owner. If you price a product or service too high, you run the risk of scaring off customers. On the other hand, pricing your product or service too low, and you risk attracting those bargain buyers who are always looking for a deal. You’re never going to get it right all the time. However, there are some steps you can take to make sure you’re close every time.
Pricing Schools of Thought
There are several schools of thought when it comes to pricing. Deciding which one works best for you will help you decide how to price your product or service.
Using cost-based pricing is one of the most basic forms of pricing.
“Cost-based pricing is the practice of setting prices based on the cost of the goods or services being sold. A profit percentage or fixed profit figure is added to the cost of an item, which results in the price at which it will be sold,” writes Accounting Tools.
For example, it costs me $1 to manufacture a product. I want to make a 50-cent profit on each product. Therefore, I will charge customers $1.50 per product.
This is a simplified explanation, but it works.
Then value-based pricing is another popular way to price products or services.
“Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of a product or service. It is customer-focused pricing, meaning companies base their pricing on how much the customer believes a product is worth,” writes Investopedia.
In other words, instead of looking at what it cost to produce the product or service, you’re looking at what the customer thinks the product or service is worth.
Another popular way to price a product or service is market-based pricing.
“Market-based pricing is when the price of a product or service is set based on its competitive market position and product-market fit—essentially pricing on par with or near your competition,” writes Revenue ML.
Let your price be dictated by what other similar businesses price their products and services at.
Premium Pricing Strategy
Some businesses will use market-based pricing as a base and then add a premium pricing strategy to it.
According to the site Profitwell, “Premium pricing is a strategy that involves tactically pricing your company’s product higher than your immediate competition. The purpose of pricing your product at a premium is to cultivate a sense that your product is higher in quality than the rest. It works best alongside a coordinated marketing strategy designed to enhance that perception.”
You charge your customers more to give the perception that the product or service is of higher quality.
If you work in an industry with constant ebbs and flows, you may want to consider dynamic pricing.
“Dynamic pricing is a congestion-pricing strategy where the price is not firmly set. Instead, it fluctuates based on changing circumstances, such as increases in demand at certain times, the type of customers being targeted, or evolving market conditions. Dynamic pricing strategies are especially common in businesses that provide a service, such as the hospitality, transportation, and travel industries,” writes Investopedia.
Study the Industry
When it comes to pricing your product, you want to look at how your competitors price their products.
Some industries work better in a dynamic pricing model, while others find cost-based pricing is the best strategy.
Remember, unless you’re entering a brand new market, many of your industry’s leaders will have already tested out pricing strategies. Let them show you what methods work.
When you study your industry, you can determine the best pricing strategy for your products.
Price Your Product
Once you’ve determined what the basic pricing strategy is for your industry, you can start the process of pricing your product.
The Goal is to Make Money
There are a couple of things to keep in mind as you’re creating your price.
Inc.com points out that no matter what you do, be clear about your main objective. You want to make money.
“Making money means generating enough revenue from selling your products so that you can not only cover your costs but take a profit and perhaps expand your business,” writes Elizabeth Wasserman for Inc.
Your product price must include a healthy pad so you can make money.
Underpricing vs. Overpricing
When pricing your product, you also want to look out for extremes. Be very careful of underpricing your product can make customers think your product is cheap. Overpricing your product can scare customers off.
Pricing is never an exact science. The goal is to get close to a number that won’t scare customers off and make you money.
Give it your best guess. It’s okay if you adjust a little bit as you go along.
Written by Erika Towne