Pricing For Success

Question: I'm still in the startup stage of my business and pricing has me perplexed. I thought I knew what to charge for my services. But after reviewing costs, my expected profit, what competitors charge and what I think customers will pay, I'm not so sure any more. Can you help me learn this complicated dance?

Answer: Well, you're right about one thing: Pricing small business products and services can be very tricky. There are many factors involved and getting it right is more of an art form than a science. Pricing too low can bring you a lot of woe, while overpricing can also doom your business.

Your goal is to find that "just right" price that customers will pay while still putting a tidy profit in your pocket.

Beware of setting prices low at the start in order to attract business. While special deals can work in some cases to start the ball rolling, going low is not always the best path.

From the outset, it's vital to understand there's a psychological component to pricing. Unfortunately, this is the most difficult ingredient in the pricing recipe to comprehend. If you set prices low, you'll likely attract customers interested primarily in price. But those may not be the customers you want, and they are more likely to jump ship for an even lower price later.

Price according to the perception of your product or service "brand." If you want to be in the upscale, premium or gourmet categories, your pricing can be higher to match that image. Customers who pay more will also expect more, so be prepared to deliver on your brand.

In a service business it's even more important to avoid pricing too low. You only have so many hours to sell and you won't likely be "on the clock" all the time. You can't make it up in volume like a retailer who can sell products cheaper if volume is high enough to make it pay.

To most customers, price is only one factor in the buying decision. They also want quality, convenience, service and, of course, results. Deliver the latter and you won't need to worry so much about pricing. If you create an image of being the cheapest, you may generate sales but alienate quality-conscious customers.

Here are six strategies that can help you establish the right pricing for your business:

1. Price separately or bundle products and services. Bundling can have a big impact on how you price. Selling package deals makes more efficient use of your time and resources, so you can offer price incentives while still making a good profit.
   
   
2. Pay attention to price points. They differ widely by product and industry. For low-cost retail items, the points may fall in $5 increments. An increase from $16.95 to $18.95, for example, won't concern customers as much as going from $18.95 to $20.95.
   
   
3. Test pricing continuously. Pricing is an ongoing process. You may need to adapt to changing conditions. Competitor prices, your own costs, customer perceptions and your profit expectations can all change. Or you may want to simply test different pricing levels to see what works best for your business.
   
   
4. Do some pricing research. Find out the norms for your type of business or profession. If you sell nationally, or even internationally, you'll need to know the range of pricing expectations wherever your customers reside. This tells you what customers are currently paying, but not necessarily what you should charge. You may want to charge more or less, depending on your brand positioning.
   
   
5. Calculate your own costs carefully. No pricing strategy is complete unless you know with as much precision as possible what your own costs are to deliver the product or service. Don't guess. Price it out to the penny and include all of your overhead costs, both direct and indirect. You should know exactly what you have to do in order to earn the profit you want.
   
   
6. Review your costs and make adjustments. With a firm grasp of your fixed and variable costs, you can more easily make changes to boost profits. For example, you might be able to reduce costs or raise prices to improve profits. Or lower prices to generate more sales.