The Price is Right

Written on Monday, July 18th, 2011 at 10:22 pm by Adaire
Filed under Financial Freedom.

Clients and customers can be fickle creatures. If your products or services are too expensive, they’ll drop you and look for someone more affordable. If your prices are too low, they’ll turn their noses up at you because your stuff is “cheap” or “low-quality.” This makes pricing one of the most important and challenging aspects of running a business.

As a small business owner, I myself have experienced this challenge first-hand. While I know how much my company’s services are worth, sometimes there are clients who are just not willing to pay the right price. When this happens, I normally just let the client go and find another who understands the quality of the services my business offers. This move is nothing personal; it’s just that I’m confident about my product’s prices and I know that they’re really worth much more than my competitors’ products. :)

While this strategy may work for me and my business, it may not work for other entrepreneurs. Many of you may be wondering how to figure out what the appropriate prices for your products or services are, and how you can tell when to adjust your prices to suit your market when the situation calls for it. Based on my own personal experience with pricing problems, I have a few words of advice to offer.

The first thing you need to do is consider your own expenses. The selling value of your product or service is primarily based on how much it cost you to produce them. Depending on your type of business, things that should be accounted for when you calculate your costs include materials, warehousing, labor, delivery, and other dues such as rent and advertising fees. The sum of all your expenses, plus a 20-30% profit margin, should be the actual price of your product or service. If your costs are extremely low (e.g. you saved a lot by purchasing materials in bulk, or you run an online business that costs significantly less than if you were running an actual store), you may consider setting your profit margin higher than 30%.

Your internal costs aren’t the only thing you need to account for when determining price, however. There’s still the matter of external factors such as the market itself and your competitors.

In the article “Pricing your Products and Services” from Small Business CEO Magazine, online direct sales and network marketing expert Sandi Krakowski emphasizes the importance of testing your market to find out how much your customers are willing to pay for what you’re offering. One way of doing this is by looking at your competition.

Sandi mentions her experience with a client who wanted to sell e-books as an example in her article. Her client’s e-book was priced at 50% less than their competitor’s, but their sales were decreasing. The client then decided to lower the price some more, thinking that a much lower price would earn them more sales. This plan didn’t work, and it was really starting to damage their business.

After taking a look at the competition’s prices, Sandi pointed out that her client was severely underpricing their product, leading their customers to lose interest in the book because they believed that the e-book was of lower quality compared to the competitors’. Sandi then recommended that the client push the price of their e-book up to just a little less than the competitors’, and this actually increased the sales.

Sometimes your problem may be caused by prices that are set too high for your target market. Sandi says that a good way to confirm that this is the issue is through conducting a sale. Putting your products up on sale means that you place lower prices on them for a certain time (while still making sure to indicate the original price). When running a sale Sandi says that you should “be careful to not put the sale price so low that you shoot yourself in the foot,” meaning that you still need to make sure that your sale should still be making a little profit. She recommends that you try a 25-30% discount and see how your market reacts.

Since your prices are based on your expenses, your market, and your competitors, you need to be prepared to make adjustments whenever necessary. If the prices of the raw materials that you used to produce your items go up, then you’ll need to adjust your prices to compensate for that. If there is a sudden spike in the demand for your product, consider putting your items on sale to increase the quantity of items you sell, or running other promos to stand out against your competition.

For you more experienced entrepreneurs out there who already have an existing pool of loyal clients, it may prove to be difficult to change your prices when the clients who have patronized your business for a long time are used to your existing rates. In this case, the best strategy is to apply your modified rates/prices only to your new clients. Think of it as turning your long-time customers into VIPs with perks, and as a way to encourage your clients to stick around and eventually benefit from the same perks.

When starting your small business, having a great product and effective advertising can only go so far. Making sure that your prices are right for your market or niche is the key to maximizing your profit and keeping your customers coming back for more.


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