Pricing Your Products or Services 1
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Pricing What You Sell
Major corporations spend millions of dollars each year to determine what to charge for their goods and services. Typically, they'll do extensive market research, plug collected data into spreadsheets only an M.B.A. could love, and then test-market the product at different prices in different geographic locations to determine what selling price will produce the most profits.
Small businesses don't have the time, money, or patience to conduct such extensive studies. So how do successful small businesses determine what to charge? More important, how can you come up with the right price for what you sell? Here is a collection of questions and answers to help you set prices that are both competitive and profitable.
What's so difficult about setting prices? Can't I just charge more than it costs me to buy or make what I sell, or a little less than what everyone else charges?
It doesn't take much seat-of-the-pants logic to realize the best selling price for a product or service should be a price that falls above costs and at or slightly below competitors' prices. But here's the rub: business owners who try to slide by on this logic often overlook some important variables. Among them:
- The amount it costs you to buy or make a product or service is often only a small part of what it costs to sell that product or service. If your prices don't allow for all the other costs of doing business, you could lose money on every sale.
- Neither production costs nor competitors' prices predict whether anyone will buy the product or service from you.
- Buying decisions are rarely made on the basis of logic alone. In fact, customers sometimes equate quality with price. If your prices are too low, they may suspect your goods or services are inferior in quality and not buy.
- Internet-based businesses have been forgoing profits in the name of building a large following. If you sell products or services that compete with such companies, you are going to have to develop a business model and pricing strategy that allows you to be competitive or that focuses on a niche market the money-burners aren't addressing.
What should be considered in pricing a product or service?
No matter what you sell, your pricing strategy should be based on these fundamental principles:
- In addition to what it costs to make or buy what you sell, your minimum price must take into consideration marketing expenses, operating expenses, labor costs, the amount of profit you want to make, and income and self-employment taxes.
- The price you can get for any product or service depends on the amount of money customers are willing to pay or expect to pay.
- There must be a large enough market to allow you to sell profitably over a long period of time. If there isn't a market for your product or service, it won't sell at any price.
Other than a few supplies, what expenses do small service businesses have?
Service businesses normally don't have to spend large sums to purchase production materials or inventory, but they can have fairly significant daily operating expenses. Even a one-person service business is likely to have many of the following expenses:
- purchase price and maintenance cost of a computer, photocopier, printers, cameras, tools, answering machine, fax, or other equipment
- telephone line and usage charges
- upgrades to equipment and additional computer software needed to meet customer requirements
- business stationery (business cards, letterhead, envelopes)
- supplies such as notepads, computer diskettes, file folders, printer ribbons, toner cartridges, mailing labels, photocopy supplies, film, art supplies, etc.
- file cabinets, desks, chairs, bookcases, and other office furniture
- cost of trade magazine subscriptions
- cost of membership in professional associations
- client entertainment costs
- sales and marketing literature preparation and printing
- postage and/or express mail and delivery services
- appropriate business insurance (fire & theft, personal liability, errors & omissions and, if you have employees, state compensation insurance)
- your salary (as the owner)
- cost of benefits you'd get as an employee (health and disability insurance, pension plan, etc.)
- federal, state, and city income taxes
- self-employment taxes
- cost of legal, accounting, and other professional services
- nonbillable time
If you have or take on employees, in addition to the cost of their salaries and any benefits you offer, you will have to allow for workers' compensation, employers' share of Social Security benefits, extra office overhead expenses, and benefits.
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