How To Set Prices For Your Small Business Products Or Services

by Tom Egelhoff

Author Tom Egelhoff

"How do I decide how much to charge for my products and services?"

That is one of the most popular questions I'm asked by small town and home based business owners.

Before we get to the actual pricing basics I need to explain my definition of pricing which may be different from yours.

For example: you probably believe that you have to base your pricing on what your competitors are charging. Your pricing has to be in line with theirs or you can't compete.

Or, even worse, that you must have a lower price to be competitive. I couldn't disagree more.

You don't have to play follow the leader with your competitors on price. If that were the case there would be one standard price list for every industry.

All bread would be the same price all shoes would be the same price.

Price is nothing more than a matter of customer perception of value based on information they are given.

If I said "CD Player" a price would probably jump into your mind.

Why? Because you have been influenced by advertising, word of mouth, marketing messages or some other source that gave you enough information about what "your perceived" value of a cd player should be.

Are all cd players the exact same price? No they aren't. Price varies based on what?

Features (that translate into benefits), Quality (ambiguous), Guarantee or Warranty (valuable to some) and/or Brand Name (advertising/marketing designed to educate the consumer).

OPEC controls the price of oil by the amount of supply they release for sale.

How To Use Customer Perception To Control Your Pricing

How do customers see your business? When they walk in your door or come face to face with you what is their impression of you and your company?

Do they see a well run shop or a mess? Do they see a business person or a guy in jeans with his shirt out? Their perception of you has a great effect on what they are willing to pay for your goods and services.

I don't know about you but I work hard for my money. I'm not about to hand it over to someone if I'm not confident that they are up to the job.

If I get a "bad feeling" about the person or business it's going to be much harder for them to convince me to do business with them.

The secret here is to always put your best foot forward. You are a business owner. Act like it.

When I go out in public I'm not always in a suit and tie but I am neat and clean and professional. If I wear jeans they are clean and not full of holes or with worn knees or cuffs.

I ALWAYS have business cards with me.

I was in the grocery store today and ran into someone who wanted to do some business with me and I had no problem producing a business card and arranging an appointment for later on this week.

I didn't have to make some excuse that I was doing yard work because of the way I looked. I didn't have to make excuses for not having any business cards with me.

You never know where business is coming from. When a business opportunity presents itself I will take advantage of it because I took the extra effort to look and act in a professional business manner.

I'll also get my price for my services because I'm prepared to do business anywhere anytime in a manner that my competitors are not prepared to do and my customers appreciate that.

Five Areas To Consider When Determining Price

1.) Is there a need for your product or service?
The greater the need the more you can demand for your products and services.

Notice I said "demand" not "ask". Never give the business away. Your business should never be "Let's Make A Deal". If you're a professional your products or services are worth the price placed on them.

As long as the customer knows what they are getting the perceived value should make the price a bargain.

2.) What about the competition? I said above you didn't have to play follow the leader with them when it comes to price but you do need to keep an eye on them.

If you are getting more business than they are look for them to try various strategies (usually dropping their price) to get some of their customers back.

You will need to analyze what they are offering customers. What perception are they projecting to their customers that you aren't?

3.) What's your market share? What percentage of the total market do you feel you have? What does your competitor have? How many competitors will the market tolerate? What effect, if any, will your pricing have on your market share?

4.) What are your pricing strategies? If you aren't sure what that means.. think of Gensu Knives.

They usually start with four knives for $39.95 which sounds like way too much for four knives. But what do they do next?

They throw in a paring knife..FREE. A melon ball knife...FREE. A juicer knife...FREE. When they finally get to about 15 knives; $39.95 starts to look like a real bargain.

The strategy is in how they present the price and the product. How can you present your pricing and products in a creative way?

5.) Special demands of your business. Does your business have special requirements that could affect price? Refrigeration? Special shipping requirements? Government regulations?

How To Establish Price Ranges

Before you can establish price ranges you must know what it takes to keep the doors of your small business open.

How much business must you do before you make a profit?

You need to establish a break-even point. This is the point where all expenses are paid and the business starts making some money.

For full details on how to do a break-even analysis See: "How To Do A Break-Even Analysis" and "How To Grow Your Business To The Break-Even Level."

Next, you need to know what your profit goals are. Are these goals realistic and in line with your break-even analysis?

Do you want to live at a poverty level or more comfortably? If more comfortably then how much above the break even do you have to do?

The last point is the one I mentioned in the first paragraph and that is the perception of your business and your pricing.

Make sure you know what the perception of your business is. Don't underprice your products or services.

It really doesn't matter what the competition is charging as long as the value and benefits of your products and services are there.

If you can't see the value of your products or services how can you expect your customers to see it?

How To Choose A Pricing Method

There are probably as many pricing methods as there are businesses to use them. Here are a few that I think you should know about and a link at the end of this paragraph to several others.

Going Rate Or Suggested Rate: This is one of the worst of the pricing strategies and I suggest that you not use it but you should be familiar with it.

If your competitors are using it then you will have an advantage. This method simply says that you will meet the prices of your competitors. With this method the pricing controls the company instead of the other way around.

Prices are changed based, not on the position of the company, but on the changes of the market.

Full-Cost Pricing: With this method you must identify all your costs and add a pre-set profit that you want to make to each item.

But there are two things that must happen to have this system work.

One, you must sell enough to at least meet your break-even point.

And, two, you must make sure that you don't miss any costs and that all are included before you take the markup.

Flexible Markups: You'll see this a lot in retail clothing stores and home electronics. Sales and very competitive markets where it is hard to position products this method is very popular.

The problem is that as you react to price you give up profit margin. Buy one; get one free works but you have to make twice as many sales to realize the same profit.

For more details on pricing methods See: "Pricing Methods And How To Use Them."

The Last Word On Setting Prices

There is one last point that I want to make and one additional page in this site I would like you to read or re-read if you have not done so already.

It's my article on positioning. I want you to look at this page in a new light. Usually when we speak of positioning we are talking about positioning your business in the mind of the consumer.

How To Develop Your Advertising Position Strategy

What I would like you to consider is positioning your price. With positioning you can set yourself apart from your competition and create a separate price category for yourself.

This is a very powerful pricing recipe. Try using it to build your business.

Also see: "Pricing Methods And How To Use Them."

"How Pricing Affects Your Business."

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