SCORE Small Business Blog

The Pricing Model Equation
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Bear in mind that although there is a handful of pricing model “archetypes;” the best pricing model is like a ready-to-wear coat taken to the tailor and adjusted to fit your exact body type. You may really be enamored with the success of another agency’s performance-based pricing engine but your business may be lacking the same factors that would produce the same efficiency and success. In other words, your company’s pricing equation includes other unique factors that when calculated, will necessitate the use of a different pricing structure. Every new business has a “Pricing Model” equation, here are the 4 main factors you need to sum up:

1. Are you selling diamonds or gravel?

It’s a no-brainer that you’d be charging more per product if you’re operating as a high-end jewelry boutique versus a pet store selling aquarium materials. Yet how you market your product isn’t always so obvious: you could position your gravel as “luxury sedimentary minerals taken from a remote dry creek bed and suitable only for the rarest of tropical fish.” Just because you’re selling gravel, doesn’t always mean that you can’t price them as diamonds. So consider what you’re providing – is it luxury? efficiency? convenience? productivity? There’s a price tag that customers will expect to pay for each of these value points and it’s your job to determine what that price tag is.

2. What are your competitors charging?

A good way to discover what your product should be valued is to research what similar products go for. Now you may say “my service/offering is so unique that I don’t have competitors.” While I find this highly implausible, I would suggest that you look at every other company in your market to understand what their pricing equation is. Most likely their target customers, production costs and marketing strategies will be similar to yours and you’ll have an appropriate gauge to see whether or not you’re overcharging or undervaluing. Also, if your competitors are charging a lower price than you, they’ll have a pricing advantage. Think about how you compare to others.

3. What is your customer willing to pay?

Is your ideal customer a spendthrift seeking the best bargain? Or does your ideal customer have a large disposable income? What rationales are behind your customer’s purchasing decisions? Are they trying to “buy into” luxury or will they only buy once they’re sure that it will provide them significant and irreplaceable value? The best way to understand what your customer is willing to pay is to ask them. Provide your first clients with a test trial or a free sample and then ask them what they would be willing to pay for your offering. This may seem a bit too direct but your customers will appreciate your candidness and your desire to actually listen to them. Also, you’ll gain insight on how you can improve your offering so that your customers would be willing to pay your ideal price.

4. Cover your behind…er…costs!

This is purely an operational factor but many new business owners forget that they need to price their product so they’ll eventually make enough to cover their overhead expenses, expected cost hikes in materials, labor and resources and future business initiatives. Your pricing equation should begin at the financials section of your business plan. Can you afford to charge $25 for a bracelet when it costs $30 to produce it? Even if you think you’re covering your initial costs, will you be running a promotion in the first weeks that will significantly slash your revenues? How can you make that up by adjusting your pricing model?

Bryan JaneczkoFounder, Wicked Start
Bryan has successfully launched multiple startups. His latest venture, Wicked Start, provides tools to plan, fund, and launch a new business. Also author of WickedStart: Guide to Starting a New Venture with Passion and Purpose, Bryan is committed to helping small businesses grow and succeed.
www.wickedstart.com | Facebook | @WickedStart | LinkedIn | More from Bryan

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  1. LindaVisitor

    The best things in life are free. My Dad taught me reading was the most importatn tool to have. If you can read you could learn to do anything you want. The freedom of information keeps us free. I have learned so much from free SCORE workshops and now this great blog. Thank you I will remember who taught me success in business. Imagine how far we’ve come since the invention of the Internet twenty one years ago. Imagine.

 

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