As a wise entrepreneur once said, “You make what you charge.” This might sound like an obvious statement, but its wisdom is apparent to anyone who has ever underpriced a product or service.
There’s not always a science that goes into the process of setting your prices and rates, but you can apply a scientific approach to data-gathering that’ll help you make the decision. It’s crucial to make pricing a priority, as it can have a major impact on the future of your business.
“Countless small business success stories—not to mention the illustrious career of Bob Barker—demonstrate the importance of getting the price right,” explains a pricing report from QuickBooks. “Beyond the logos, user interfaces and organization charts, your business values the bottom line, and your customers are no different. Pricing isn’t a static venture: it should and must slide with changing market considerations, new products and evolving business goals.”
Yes, pricing is important—and your understanding of the process can make you a regular Bob Barker when it comes to getting it right.
Cracking the Code on Pricing
What’s really at stake when you set a price? Make it too high, and you’ll lose out on sales. Go too far in the opposite direction, and your profits suffer.
“There’s no point in setting a price point that will make you bankrupt,” says Entrepreneur. “The aim of the game is to be turning profits, so what your business charges for its products or services needs to cover all outgoings at the very least. Yes, you might be able to charge slightly less at the beginning if you’re lucky enough to have acquired serious funding for your venture, but your prices should always make financial sense. If they don’t cover enough for you to break even, you should probably rethink. Similarly, if the amount you need to charge just to break even is too high for the market, you’re going to need to adopt a different approach to building your products or offering your service in order to make it financially viable.”
It may seem counterintuitive, but many entrepreneurs neglect pricing. They spend countless hours developing their products or honing their services and thousands of dollars marketing them to the public, only to stumble through the crucial step that determines how much money they’ll receive for all their hard work.
Don’t allow yourself to fall into this trap. Approach pricing with the thoughtfulness and care that you’d use if you were naming a baby. After all, the price is going to stick with the product or service a long time and will impact how people view it when they “meet” it.
Here are a few various elements to consider as you ponder pricing:
- What are the product’s or service’s attributes?
- What is the value for those attributes?
- Who is my target audience?
- What can my target audience afford to pay?
- What is the consumer demand?
- What are my competitors charging?
- What are my revenue goals?
- What are my marketing goals?
Using the information gathered, you can begin to put the pieces together and construct a fair price that works for your customers and aligns with your business’s goals.
Tips for Success
Given the nuances of pricing, it can be helpful to get advice from a trusted mentor. If you don’t currently have a mentor, lean on your friends in the industry. These individuals won’t have all the answers, but they can help to steer you in the right direction.
Here are 5 other tips to help nail down your pricing and start bolstering your profits:
- Ask a stranger: Given your sizable financial investment in your product or service, it’s likely that you understand its full value better than someone who’s never used it. For this reason, it’s also important to get pricing insights from potential customers. You can do this with surveys, panels, or informal conversations. Use the pricing conclusions from your research to understand the perceived value of what you’re offering.
- Don’t be afraid to nudge it up a bit: Once you’ve gotten an outside perspective on your pricing, correlate it with what you already know. You may feel an obligation to keep your price at or below the customers’ preference—but you should also trust your gut. You can often move the price up a few ticks and still be in great shape.
- Remember who you are: A big reason you should price a bit higher: you’re a small business. You don’t get the bulk discounts and operational savings that major stores do, so don’t stress about beating their prices. Stay true to your brand and focus on ways to show customers why you’re worth it.
- Think about tiered offerings: The tiered pricing model has really taken off in recent years, as it allows you to deliver the right value to the right customers. If you currently have a one-size-fits-all offering, think about ways to break it out into more customized options.
- Don’t forget the add-ons: In addition to tiered pricing, consider complementary products or services that can help to increase the true value of each sale. As long as the add-on is relevant and benefits the customer, it can help you to receive more lift from each sale.
However you end up pricing your product or service, it’s essential that you move forward with confidence. A price that’s presented with trepidation will never be trusted by a customer.
At the same time, you should leave room in your plan for flexibility. You might discover that your price isn’t high enough to allow for the necessary profit. Or there could be strong demand and a chance to begin gradually increasing an item’s price sooner than anticipated.
Just be sure to base all subsequent pricing decisions on the same type of research you used to set the initial price. This thoughtful approach ensures you won’t just “make what you charge”—you’ll also “make what you’re worth.”