Your prices can make—or break—your business. Price something too high, and you won’t get enough customers to keep your business afloat. Price them too low and your profit margins may be too thin to be sustainable.
In fact, pricing and cost issues were a factor in 18% of startups’ failure, according to one analysis.
Many small businesses struggle to find the right price point, but you don’t want to waste precious time doing trial and error that could ultimately hurt your business. How do you set the right prices for your products or services from the get-go? Here are the keys to smart pricing:
Calculate your true costs.
Your prices may not be directly related to all of your costs, but you need to make sure you’re at least making enough profit to cover your costs. And that means knowing what your costs are. It’s easy to underestimate your true production costs. You need to include any cost of materials, packaging and shipping, for example. But you also might factor in items such as upfront costs of a product’s or service’s development, licensing fees, employees’ salaries and taxes. And don’t forget about overhead expenses, such as maintaining an office, store, warehouse or manufacturing facility. Only after all of those expenses are covered can you begin to think about your profit margin.
Understand your competitors’ pricing.
The type of business you own—and how your competitors price their goods or services—is another important factor. The market often dictates pricing structure, and profit margins may vary widely among industries.
Online tools may help. Skuuudle, for example, tracks prices on pretty much any product with an SKU (stock keeping unit) code so you can see what your competition is charging. If you run an ecommerce business, netRivals claims to track more than 400 million products in online marketplaces in more than 50 countries. Industry groups and professional associations may also offer pricing research for certain types of service businesses.
That said, setting prices often means evaluating your direct, local competitors. Adrian DeGraffenreidt, a principal consultant at CoCreative Management in Apex, North Carolina, helped a client conduct a competitive pricing analysis for her professional blogging service. Given that the blogger had 16,000 regular followers, her main competitors were a regional magazine and a small local paper. DeGraffenreidt helped her compare those publications’ advertising rates and readership to the quantifiable views she received to her blog and come up with a flat-rate retainer for her services.
The competitive price analysis meant the blogger was able to increase her rates—and better justify to clients why she was doing so. A few clients balked at the price hike originally, but within a few months she was doubling her monthly income and was locking in longer-term clients, he adds. “The competitive research gave her the insight to price her service appropriately.”
Consider tiered pricing.
In some industries, pricing will need to evolve along with the business or its customers. When Ryan O’Neil founded Curate in 2015, he had one product—a software program that helped florists generate invoices—that he licensed for $47 a month. Since then, the company has rolled out a wide range of software-as-a-service (SaaS) products to florists and event planners.
O’Neil adapted his pricing structure so that now he charges clients a licensing fee based on the number of software features they need and users they have. He didn’t want to make the mistake of being locked into a $200-per-month plan with a once-small business that had grown into a national operation.
Test the market.
Ultimately, some businesses have to use the market—their customers and prospective customers—to find a price point that makes sense. When Julie Austin launched her line of wristband water bottles, Swiggies, she tested a variety of prices between $6.99 and $14.95. She finally settled at $12.95, which was a comfortable price for many shoppers but not so “cheap that people would think there’s something wrong with it,” she says.
She did find a few buyers willing to pay $14.95, but only at luxury gift shops. Austin’s advice: It’s better to overprice than underprice in the beginning. “If you’re selling it for too much, the public will let you know,” she says. “You can always bring the price down, but it’s much harder to raise prices.”
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