Pricing your product or service correctly is one of the biggest challenges startup business owners face. But the conundrum of pricing doesn’t end after you launch your business. As your business grows, how you adjust your prices can make or break your business. What are some factors you need to consider when setting prices for your products or services?
Start by determining the cost of manufacturing or buying what you sell, or providing the service you offer. This can include things like labor, equipment and materials. You also need to consider your ongoing overhead costs, such as the cost of renting your store or office, utilities, payroll and the like. You need to make enough to cover all these costs and still make a profit.
In addition to running these numbers, you need to consider a few other factors when setting prices:
Your competition. Keep up-to-date on the prices your competition is charging for similar products and services. As you survey the market, you’ll likely see a huge range in prices for the same things. Figure out why certain companies are able to charge more and why others charge less. Maybe the higher-priced competitors offer top-notch service, exclusive products people can’t get anywhere else or lots of extras. The lower-priced companies are probably bigger with economies of scale in their favor.
Your sales channels. The methods you use to sell your product or service (retail, ecommerce, sales reps) will affect your pricing. If you sell camping gear directly to customers via a website, for instance, you can likely charge less than if you wholesale your product to retailers who have to mark up the price so they can profit. If you sell business services on a website where customers pick their own package and subscribe, your costs are much lower than if you have a team of salespeople who personally consult with each prospective customer.
Your customers. It all comes down to what your customers are willing to pay for your products or services. If you aren’t selling enough, that could be a sign that you either need to lower your prices or change your sales and marketing strategies. Be careful not to cut your prices so low that you’re not making a profit—if you do, all those customers you’re attracting could hurt your business more than they help it.
As you might have guessed by now, there’s no simple formula for pricing your product or service—it’s both a science and an art. If you need someone with more experience to help, the mentors at SCORE have the expertise you need. Visit the SCORE website to get matched with a mentor and get free business advice 24/7.