Guest Author - Deborah Crawford
Many small business owners have trouble knowing what to charge for their products or services. Some big businesses have trouble with this, too! For specifics on determining what price you need to charge to make a bare minimum profit for your materials, labor and overhead costs, read Knowing What to Charge which discusses how to determine those costs.
When someone asks me what they should charge, my response is that you should charge what the buyer will pay. Of course, there’s more to it than that, but essentially, that is what anything is “worth”. Market value is very important and the better you understand that, the more money you can make in both the short run and the long run.
Read up on basic economics if you don’t understand supply and demand and how they affect the market value and pricing of just about anything. One example I use a lot is blue jeans. Any pair of blue jeans has basically the same amount of material, close to the same labor cost and widely variable overhead costs, but essentially, basic jeans can be made for somewhere under $30 (I’m guessing high.) But, jeans prices vary in the mall close to me by at least a hundred dollars if not more. You can buy jeans for under $20 on sale and you can pay over $100 for the newest fashionable name-brand pair. Again, the basic costs are the same. The difference in pricing lies in marketing, brand value, and demand. And, for jeans, in having a celebrity who mentions them and/or wears them counts quite a bit in all three.
So, to determine market value of your product or service, survey what the market pays. Just call around and ask, look it up on the internet or use catalogs. Try to be as close to the methods you would use to sell your products as possible. If you want to sell via your own boutique shop, find boutique shops to check for prices. If you want to sell online, search online. Ditto for catalogs, direct mail, and so on.
Keep a record of all the prices you get, notating info such as whether it is on sale, what materials it contains, how much delivery/distribution costs, location of the storefront, marketing and advertising, what the quality is, and what the demand is. Some of this you will not be able to determine on every call. If you have no idea, check some online forums and ask your friends and associates what they thing X is worth or if they have heard of company Y.
You should be able to get a decent idea of the low, mid and high prices for your product or service by doing some of this research. You will also be able to determine if the company spends way more than you can afford on marketing or if they are in a wealthier area or lower-income area and so on. If you can afford to, purchase some of your competitors’ products and/or services. That is one of the better ways to compare, especially if you can be objective and honest with yourself.
Once you know what the pricing structure is for your business, then you can determine where you will “position” your product or service. Do you go head on with the top seller or price low for volume sales? Do you narrow your market or try to sell to the masses? Do you offer better service or do-it-yourself bargains?
Do your homework about pricing and set your prices to meet your goals. Review your pricing policies often, which means daily for some products and services, and yearly for some others. You want to make sure you know what your competition is doing so that you can be as proactive as possible to make more money.