Determining the price of the products or services is one of the trickiest decisions for a new home business owner. Many home-based entrepreneurs fail to consider the importance of properly setting up the right prices for their products or services.
Very often, this important aspect of our business is neglected simply because we do not understand the concept. Most of us take the cost of a product, multiply it with an estimated percentage, then close our eyes and hope that the resulting number will safely produce a sufficient profit. But if you calculate or guess wrong, you’ll soon be out of business.
Theoretically, the price you set for your product or service will have a direct relation to the demand it will have at that price. At a glance, you can have a quick analysis whether you have under-priced or over-priced your product based on the reaction of the customers. You may want to make adjustments as the demand increases or decreases.
It is easy to calculate and set a price. However, it should be remembered that pricing varies between businesses. What works with one may not be true to others. Nevertheless, it almost always follow some basic rules which will be workable in every situation.
In a traditional business, for example, many stores set their prices on a specified or fixed mark-up: for example, setting the price 200% of the acquisition cost. That means that when they buy a merchandise for $5.00, the selling price is automatically set to $15.
This pricing method can be sufficient for some operations. However, some entrepreneurs fail to calculate other expenses which can greatly reduce the gross profit as expected from the 200% mark-up. Most of us forget to include many variable expenses to our costs, and ultimately lose track of new expenses which may affect our original costs, so much so that the prices initially set do not reflect an effective cost plus profit figure.
If the costs are not properly incorporated in the selling price, there is a chance that the whole operation may not be profitable after all – a surefire way to financial disaster. Failure to properly account for all costs, despite thinking that a considerably high mark-up over the cost is placed, is a common reason why some businesses fail.
To use this formula effectively, you need to understand the cost structure of your business. Your business has fixed and variable costs which must be integrated with the cost of the products or services. These are:
- Space Rent (add a cost even if you are using home office space)
- Employee (s) (if any)
- Employee Benefits (if any)
- Office Equipment
Variable costs that can affect your overall profits can include:
- Postal and messengerial Services
- Freight and Delivery Charges
- Promotional Efforts
- Distribution costs
- Phone Calls
- Business Forms
- Office Supplies
Once all the costs have been calculated, the next step is to calculate the amount of profits you expect to make.
Another technique many entrepreneurs use to test their prices is to offer an Introductory Price. In order to stimulate demand, the prices can be discounted on specific periods of time as a special promotional effort. As time passes and demand increases, the price can be adjusted higher until it reaches a stabilized level.
Prices, however, are not necessarily set under one guideline. It is easy to price your products or services based on your costs and the percentage of profit you want to make. However, to determine the most effective price, you have to think of your customer. Many products and services can be priced according to the perceived value of the product or service by the ultimate user.
Better profits can be made when you come up with a product that could be of immediate need. Snow shovels, for example can command higher prices when there is an announcement of an impending snow storm in your area. You can also bunch together your products or services as a package, and generate higher profits. A set of three CDs recorded with children’s songs may cost $10.00, but the same set may be sold for US150.00 if it were sold as children’s educational and learning set. A stem of rose may cost fifty cents but may sell for $30 if bunched into a bouquet of twelve. And many other ways.
Keep watch of special events, seasons or occasions. Again, roses can command up to $100 a dozen on Valentine’s Day. Items related to occasions such as Christmas, Halloween, Easter, etc. always command higher prices during the celebrations. However, if you were involved with seasonal items, try to maintain a low inventory as it can drastically eat up your over-all profits if you are not able to dispose them on time.
There are other factors that can also affect your pricing decisions. Competition, for example, can prevent you from setting your prices at higher levels. Market conditions, like recession can force you to reduce prices drastically as to affect profitability.
In the end, where the survival of your home business greatly rely on the revenue that it generates, you have to pay particular attention to how you set your prices. Calculate your costs and look a little bit farther. Through a serious research on your target customers, you can anticipate how much they are willing to pay for your product or service and set your prices where it is best advantageous.
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
- 7 Tips In Setting Your Prices
- 15 Pricing Tips for the Small Business Entrepreneur
- Value-Based Pricing Strategy for Your Business
- Pricing Business Services: How Much Should I Charge?
- Managing Retail Price-Point and Margin Pressures