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Choosing the right price is critical

Just how important is selecting the right price in your business? It could mean the difference between success and failure. The wrong price can put you out of business. Finding that magic number requires careful thought and planning.

There are basically two schools of thought when it comes to pricing your product or service (above your break-even point):

1. If you are more interested in growing rapidly and capturing a larger share of the market (called, of course, your market share) then you need to price your goods as low as possible because the laws of economics dictate that a lower price will attract more customers. Volkswagen sells far more cars than Mercedes, but Mercedes makes more money, per car. If you are going for a broad customer base, then you need to figure out, often by trial and error, what price people will consider a bargain, and which still allows you to make a profit.
2. However, if dominating the field is not your business model, if you are more interested in increasing profits, then you need to go with a higher price. It has to be near what the competition is charging yet high enough for you to live on. No, it’s not always easy to figure out and yes it takes time.

Add into this equation the brand you are attempting to create. A big part of how people perceive your business is based on what you charge. Two lawyers may do the exact same sort of work, but the one who charges $350 an hour will be perceived as better than the one who charges $150 an hour. Yes, she will get fewer clients, but they probably are better clients.

Here is the analysis to go through to determine your fees and prices:

1. Determine your break-even point. Use the formula above to calculate your break-even point and start there.

2. Identify your customers and brand. Are your customers middle class or wealthy? Is your brand upscale, or not? Do customers want bargains or is quality more important?

3. What is the competition doing? Again, people look for bargains. If you can afford to beat the competition, all other things being equal, you will get business.

4. Don’t set your price too low if you want to grow. The best source of cash for growth is a healthy gross profit margin.

5. Test, test, and test some more. Finding the right price will require trial and error. Tinker.

Steve Strauss – Founder, TheSelfEmployed.com and MrAllBiz.com Steven is one of the world’s leading entrepreneurship and small business experts. He is a lawyer, public speaker and author, speaking around the world about entrepreneurship. He has been seen on CNN, CNBC, The O’Reilly Factor, and his column, Ask an Expert, appears weekly on USATODAY.com. www.theselfemployed.com | www.mrallbiz.com | @stevestrauss | More from Steve