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A small business blog featuring tips to help entrepreneurs succeed in the small business world. Topics include family business, human resources, marketing, money, networking, operations, ownership, startup, taxes and technology.
Finding the Right Price for Your Product or Service
The price of the product or service you provide determines whether your business succeeds or fails. If the price is right (as Bob Barker says), then your business will produce profits and grow, but if it’s wrong, your business could be destined for bankruptcy.
Far too many businesses choose the price of their product/service based upon only one calculation, when there are actually a number of elements you should consider together to come up with the best amount.
When determining a price for your product/service, considering the following:
Cover the Costs
The price you come up with should include enough to cover the cost of manufacturing the product or providing the service your business has to offer. If you travel, include the cost of mileage and expenses. If you provide mass quantities of a product, divide your costs to determine what it costs to make only one. If you can’t cover your overhead in the price of a product, your company will never break even or even make a profit.
Consider the Competition
And when I say consider, that’s exactly what I mean. Don’t price your product/service to be cheaper than the competition, just in the hopes that you’ll get all their business. If consumers trust your competitor more or like his product more, they will still go to him, even if he is more expensive.
However, when determining your prices, keep your competitors’ prices in mind as a range, since you don’t want to set your prices gobs higher (or too much lower). Also, look into how much business they generate and how that relates to prices they provide. Supply and demand really comes into play here.
Calculate the Value
Determining the true value of the product or service you are providing by looking at what consumers are paying others for it. eBay is a great example of how every person values things differently. Ask people you trust, such as friends, family and employees, what they would be willing to pay for your product/service and what they would expect would be included at that price.
Find out what clients would do if your product/service wasn’t offered. Also, ask them how your product/service is helping. If Bob tells you that you are saving him tons of money because your product is so inexpensive and delivery super fast, then you should probably be raising your prices a bit and charging more for a speedy delivery (while still giving Bob a great deal, of course).
Make sure you are looking at all of these elements when determining what your prices should be. And don’t worry about changing your prices if what you currently charge isn’t working. Most consumers won’t even notice, and you can simply explain to the ones that do that you really weren’t making it on the previous prices. If they are loyal to your business and like the product/service you provide, they’ll understand.
The following questions are things you should take into account when establishing your prices–
1) What are the direct costs of your product or service?
The direct materials and labor associated with your offerings.
2) What are your business’s indirect expenses?
Often referred to as overhead and include expenses such as insurance, advertising, rent, office expenses and more.
3) What is your breakeven point?
Breakeven is where your costs and your income are equal–meaning, there’s no profit.
4) How is your competition pricing their offerings?
Compare your products to the competition. Adding value enables you to promote your products more profitably.
5) What is the state of your industry?
What was hot last year may not be this year. Understanding the market landscape will help you make better business decisions now and in the future.
Set your prices accordingly, but don’t be afraid to adjust them to your business’s need and market changes.
• BusinessWeek.com: Pricing – The Magic Number
• Office.Microsoft.com – Set the Best Price for Your Product
• BusinessWeek.com – Setting Your Product’s Price
• Wikipedia.org – Pricing
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