When a business's product or service is overpriced, the signs are clear: The phone doesn't ring, and the customers aren't making purchases. But when a business's offerings are underpriced, it can be more difficult to recognize a problem. Learn how to determine the perfect price for your product or service.
By Chad Preston
When it comes down to it, price is everything in business. The right price can translate directly to significant sales. To a small business, how much you charge for your products or services can mean the difference between fulfilling your entrepreneurial dreams or closing up shop. So it’s crucial to strike just the right balance.
“I don’t think there is only one way for a small business to set its prices. You have to take into account a lot of different variables, everything from the kind of business you have, to the kind of clients you want to attract, to where you are in your business life,” says Rachel Weingarten, president of GTK Marketing Group in N.Y. and author of Career and Corporate CoolTM.
Do Your Research
You need to figure out what your competitors are charging and what they are providing for that price, Weingarten says. You also need to figure out how you will bill and how many man-hours are going into a product, she says.
“Figure out what others are charging, figure out what you’re worth, figure out what’s going into it and then if you can, talk to the client. If they’re not comfortable with your prices, ask them why. See what it is that doesn’t work,” she says.
Marcia Layton Turner, Rochester, N.Y.-based author of The Unofficial Guide to Marketing Your Small Business, suggests that small businesses first look at their cost structure, how much it costs to produce each unit of product or service that the company sells.
“You need this in order to be sure that you’re going to be profitable,” she says. “I think sometimes companies lose sight of why they’re in business: to make a profit. It’s not to make sales, it’s profitability — how much you have after you pay all your costs.”
You also need to think about the marketing side of the equation, Turner says. How do you want your company to be perceived? You may be able to come in at a lower price than your competition, but is that how you want your customers to see you, as a discount or value-based company? Or do you want to come in at a higher price and go after the more service-oriented, upscale customers?
“That’s a choice only the company can make based on their message and brand,” she says. “Once you have those three pieces: the cost, what the market is pricing and how you want to be perceived, you price yourself accordingly. You want to come in where you know you have a customer base that is willing to pay that price and that it is going to be profitable for you.”
If you don’t have something “extra” to offer to justify higher prices than your competition, you’re going to need to come down in price, Turner says. But it should be apparent that your price is too high if you’re not selling and you see that your competitors charge less.
Weingarten agrees that customers’ reactions can be a good barometer to see if you’re pricing correctly. “You very much need to gauge people’s reactions and you also have to trust your gut,” she says. “If you feel you’re providing a very superior product, and someone says this is too expensive, they’re not the client for you, but conversely, if every single person comes to you and says ‘Whoa that is ridiculous, I could never afford that,’ you’re overpricing.” If you’re not backing up that price with superior products or services, people aren’t going to come back to you.
When you are underpricing, you’ll feel that there’s always more going into the project than you agreed on, Weingarten says. “We all want to over-deliver, that’s a great policy,” she says, “but you don’t want to over-deliver to the extent that you’re going to lose money.” When your business is underpricing, you’re usually the best person to figure that out, she adds.
You know you’re underpriced when you’re quickly selling out of all your products or you’re booking your schedule too full, too fast, Turner says. That’s when it’s time to raise your prices, she says. She suggests raising them until your sales and profitability peak.
“If you have your prices too low and you raise them a little bit, you’re going to lose a few customers but your profitability is going to increase because you’ve charged more,” she says. “You need to raise prices until you’ve lost customers but you’re still at even higher profitability and you stop raising them when your profitability starts to drop, either because you’ve lost too many customers or your total sales are lower.”
The Price is Right
“It’s really a balance of ratcheting up the price until you get to a point where everybody is happy; everybody who wants the product at that price can get it. That’s also the point where you’re making the most profit,” Turner says.