Pricing your products and services accurately is one of the most crucial steps that you can take to create a profitable business. You have to make a profit over and above your production costs, but if the price is too high relative to the market, you’re sunk. Too low and you simply won’t break even, or customers may simply undervalue your product. But within the flex room in the middle, how can you determine the best price point?
Here are some tips:
1) Set your price so that it will adequately compensate your business for its time and effort. Ensure that you take into account all of your costs when setting this price, including overhead, materials, and hours worked. Otherwise, you will work overtime on projects and create an ineffective business model.
2) Price based on comparable products. If you sell t-shirts, look at similar quality t-shirts in other stores. Or if you’re selling solar panels, you can take account the price differential between standard energy sources and your panels. If you don’t have obvious competitors- for instance, if you’re selling unique travel or advisory services, market your product based on its uniqueness or the time or money it saves a customer trying to go it alone.
3) Determine your ideal market segment. If you want to sell to high-end customers, ensure that your model matches what your customer will pay, and position your brand and marketing strategy accordingly. If you want to sell to the middle or low end of the market, you may want to emphasize different factors such your product’s affordability or accessibility.
4) Watch your competitors. Notice how much they are charging and why. How does their service and value differ from yours? Are they charging a higher price because they are marketing to a higher end market? Or are they selling at a lower price because they sell their products in bundles, or to longterm customers? You may not price your goods at the same point, depending on your market, but you should be able to justify the cost of your service.
5) Optimize your production costs to maximize profit. Don’t compromise quality, but ask around to ensure that you’re not overpaying for your materials. If you can’t reduce your production costs any further but your prices are still too high relative to the market, aim to sell at a low margin and sell in larger quantities to compensate.
6) Experiment with selling your product at slightly different prices in different venues. Selling goods online may allow you to sell at a lower price to a wider audience, but selling in a store- depending on your product- may enhance brand loyalty.
Finally, if your product isn’t selling, check with the customer. Assess whether it has design flaws, or if it doesn’t quite suit their needs. If they’re finding better deals elsewhere, consider how you can add more value to your product for the same cost.