Setting your pricing structure is one of the most difficult tasks a business owner must tackle. It’s easy to assume certain pricing strategies, such as cost plus a certain percentage, valuing your time per hour, etc. However, setting a price is almost like a fine art.
It is imperative that you take the proper time to determine the correct pricing structure for your business. Setting your prices too low can cause you to lose money, but so can pricing too high. And pricing your services may be even more difficult than pricing retail products that you buy wholesale.
But as most experienced and savvy entrepreneurs will tell you, a higher price may cost you to lose a certain amount of customers, but the ones you attract will be the ones you want for your business.
Consider the Number of Projected Sales
Most small business owners make the mistake of thinking that more customers mean more sales. However, this is quite the contrary when you crunch the numbers.
For instance, say you have a new product you want to put on the market. If you price it at $5, your analysis shows that you could sell 10,000 units. That’s $50,000 in gross sales. But what if you sold it for twice that? Or even four times that amount at $20? If you crunch the numbers, you may discover that you might only sell 3,000 units, but that still grosses you at $60,000. It simplifies your manufacturing costs and allows you to find the ways to add the quality and value necessary for making that pricing justifiable.
Consider also the possibility of servicing the products you manufacture. If you develop software or make a quality central heating unit, the fewer you sell means the fewer you’ll have to service in the future. If you sold 20,000 units compared to just 5,000, just think of all the extra customer service personnel you would have to hire, train, and retain.
Consider What You Want, Not What You Need
Another mistake many new small business owners make is focusing more on what they need, rather than what they want. Say after careful analysis you determine that your solo work at home service business requires a minimum of $4,000 a month. That covers your mortgage payment, maintenance, utilities, car payment, food, and a little left over for entertainment and a few new clothes now and then. So you can live on $48,000 a year, and that’s what you need. But what if you want $75K? Or $100K?
Just consider the possibility of $100K a year for your business. In order to earn gross sales of $100K, that would mean earning $8,333 per month. If you worked an average of 8 hours a day for 21 days a month (taking weekends off), that’s about 173 hours. That breaks down to just $48 an hour for your services. Not an unrealistic goal at all.
Check Out the Competition
One important task that all small business owners should do before setting or raising their prices is determining what the market value for their services or product is. Check out what other similar business are charging. It may require doing to covert research in their store or calling up to “tire kick” on their pricing.
Then make a matrix citing each company’s prices relative to each other. Determine the average price. Then consider what adding a little extra value could do to the price. It could be packaging, home delivery of a service, a 10-point ‘quality check’. Then add that value to your product or service to justify your higher prices. You will find that people don’t all just buy because a price is the lowest. Many consumers justify a higher price as higher quality and thus are willing to part with more of their money for it.
It is no shame to charge more. Raising your current prices may block certain customers whom you have previously served. However, it can open doors to an entire new customer base and an even more lucrative niche market.
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