“I stumbled across a local newspaper’s website and called the web developer to see if he would like some help with a site update. I was asked for a quote, and, after some research, delivered a quote based on my skill level and experience. It has been three weeks now, and I haven’t heard back from them. I thought I went about developing the quote the right way, but now I’m wondering if my pricing was ridiculous and they just ignored it completely.”
Setting prices is probably one of the most misunderstood aspects of running a small business. Price your products or services too high and you risk losing customers to your competition. Price yourself too low and you run the risk of losing money. In any successful business, you want to set prices to cover total costs plus a respectable or healthy level of profit. Before setting your prices, there are three things that you need to consider:
- Do you fully understand the overall market for your product or service?
- What channels of distribution exist for your company?
- Do you know who your competitors are?
WHAT’S YOUR PRICING STRATEGY?
If you are setting prices in a retail environment, you want to be familiar with these two costs. The first is the cost of acquiring the goods, also known as the cost of goods sold, or COGS. The other costs are called operating expenses, which can include wages, advertising, salaries, rent, utilities, and office supplies, among other things. In the case of our retail example, one of the key factors for determining your pricing is markup. Your markup is how much above what the product or service costs you (i.e., your operating expenses, which might include the wholesale price of the product, advertising expenses, etc.) that you charge your customers. The markup should take into consideration some level of profit for yourself and can be either a percentage or some set amount added to the COGS price. This pricing strategy is known as a cost-based approach.
A competition-based approach is a pricing strategy in which a company sets prices based on those of its competitors. If nonprice considerations are important to customers and there is a certain level of differentiation between your product or service and the competition, such as customer service, exclusivity, or employee expertise, then it is possible to pursue a prestige-pricing approach. This approach allows you to charge higher prices. There is also the penetration pricing approach, which focuses on settingprices low in order to gain customers and market share quickly. However, tread carefully because when you eventually decide to raise prices, it could lead to sticker shock for your customers.
PRICING FOR SERVICES
Over the years we have shifted to a more knowledge-based society where a person’s professional experience is offered up as consultative expertise. In these cases, consultants usually price their services by the hour and according to their experience level. For longer assignments, you might consider a complete project cost. This project cost could include charges for an estimated number of hours worked, travel expenses (if applicable), and special costs such as equipment or printing as well as marketing expenses.
In looking back at the question at the beginning of this chapter sent to us by an up-and-coming entrepreneur, I would say that they were definitely on the right track. On the one hand it could be that the pricing they submitted frightened the potential client away. But a more likely scenario is that it simply might not have been the right time for the company to make a financial move—even if it wanted to. In that case the options are to follow up with the company at a later date. Or they can get some feedback on their pricing strategy and then start making some more phone calls.
SETTING YOUR PRICES
Setting prices for your company’s products or services shouldn’t keep you up at night. Consider the following when developing your next set of pricing strategies.
- Determine which of the pricing alternatives discussed fits your product or service best?
- Does your price point allow the company to realize a reasonable amount of profit?
- Is the pricing consistent with the image you are looking to project?
Are there value-added services (free delivery, customer service, etc.) that you can incorporate that your customers might be willing to pay more for?