Price is one of the four major elements of a marketing mix. The right price should meet the requirement of the buyer and seller. If you hit the optimum price, your customers will be happy, your profits will be higher, and your bottom line will be healthy.
However, setting the right price is one of the most difficult decisions to make when starting a business. Many small business owners make the mistake of setting up a flawed pricing structure. As a result, they find themselves out of business so soon, or they are working so hard for so little.
Determining prices must be based on a broad, thoughtful basis. It requires a basic understanding of both your financial and business goals. Here are a few principles to consider when you decide what prices to put on your merchandise or service.
1. Keep your prices realistic.
A realistic price is the price you set after taking into consideration various factors: the direction of your business, your cost structure and expenses, your resources and financial goals. Avoid setting your prices based on “what everybody is charging.”
What is right for your competitors may not be profitable for your business. After all, their goals, strategies and financials may be different from yours. Research your competition and see what they are charging, but do not copy their pricing structure just to charge what everybody else is charging. Set your prices based on your own situation.
2. Cover all your costs.
The price of your item should cover the costs associated with it, its contribution to the overhead, and profit. A successful pricing strategy is one that results in the most dollars after all your costs are met. Be careful in setting your prices too low: while it may attract a large sales volume, you may not be making enough revenue to cover the costs of selling the merchandise. If you set your prices too high, your sales volume may be so low you can’t cover operating expenses.
3. Check your prices against inflation.
Your prices must keep up with inflation. Inflation increases your cost of doing business, with the prices of your materials, overhead and other costs increasing. If you maintain your prices despite rising inflation, you will erode your profit margin. Allow your business to increase your prices at least once a year, but give your customers sufficient warning about the price increase. Once you’ve established your policies, constantly monitor your prices and operating costs to insure profit.
4. Include in your pricing the value of your time.
Avoid committing the mistake of not including a salary for yourself, particularly if you are operating a service business. Your time is valuable, and you need to compute it in your pricing structure.
5. Customers are not always looking for the lowest price.
Price is not always the topmost concern of customers. There are many customers who do not mind paying higher prices, particularly if they know that they are purchasing exclusive merchandise, or your business is located in a convenient or high-end location. Many customers are willing to pay premium prices for quality service: speedy delivery; helpful and friendly customer relations; excellent product knowledge, or satisfaction in handling complaints.
6. Price low, but smart.
A common pricing strategy for small business, particularly new entrants into the market is to price low just to get the work. By pricing low, the aim is to penetrate the market and get as much repeat business.
However, be aware that pricing low can have adverse repercussions on your business. First, a low price may signal a low quality product and service. Be careful in setting prices too low. Second, it may be difficult to raise prices later on once customers are accustomed to your low prices. Third, your start-up business is yet to develop economies of scale that makes it hard to compete on price.
7. Use discounts with care.
Offering discounts is a good strategy for encouraging repeat/bulk orders, bundling sales, and early payment of customers. Discounts also allow you to more quickly sell products with vanishing opportunity — e.g. products with sell-by dates, seasonal and quick obsolescence like fashion and technology. You can also stimulate demand for your products during the times when your product/service is less popular. Discounts are also used to clear out merchandise that has become outdated.
Recommended Books on How to Set Prices:
- The Strategy and Tactics of Pricing: A Guide to Growing More Profitably
- Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table
- Impact Pricing: Your Blueprint for Driving Profits
- Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability