You’ve got a great idea for a business you’ve decided to launch – but how do you go about pricing your product or service? Too high and you risk pricing yourself out of the market and losing valuable sales. Too low and you’ll be selling your product or service for less than it’s worth.
Pricing is not an exact science, but there are several accepted methods which can be useful. You can use them on their own or in combination. Irrespective of what method you use, you’ll also need to take into account what potential customers are prepared to pay. Perceived value can vary from customer to customer and may be quite different from actual value.
You’ll obviously want to earn the maximum return, however you price your product or service. It’s worth spending some time working out how you can prove, and increase, this value.
Common methods for pricing your product or service
The most common ways to determine price are the cost-plus model and the competitor model.
If you add all the costs involved – material or products, labour, postage, overheads and anything else – and then add a percentage mark-up, you’re using the cost-plus method.
The competitor model is to base your price on what other businesses charge for a similar product or service in the same market. Finding the going rate might mean a quick online search or making a few calls. It might even mean getting someone to visit the business on your behalf.
Don’t just blindly follow the crowd if you use this method. Use your break-even (the price that covers all your costs) and how much margin you want as a baseline. Some of your competitors may be about to go out of business and you don’t want to copy their mistakes!
Make sure you are comparing apples with apples too. Do all the products really comprise the same materials, quality and included options like after-hours service? If yours is a premium product, customers will expect to pay more (or less, if yours is the cut-price version).
What will your customers really pay?
Another way to price your product or service is to work on what your customer thinks your product or service is worth. A small fitting costing a few dollars could save a customer hundreds of dollars and many lost hours. For peace of mind they may happily pay a price which is many times the cost of manufacturing it.
The most common way to find out what customers think your product or service is worth is to hold a focus group. This could even be arranging morning tea for half a dozen potential customers. Tell them your ideas and ask what they would be prepared to pay for your product or service. Investigate different options too. One or two extra features could lift the product or service into a different category with a higher margin.
Add value to increase price
Let’s assume you make drink bottles. Mothers may pay more for a model with an integrated cap which can’t get lost. Hikers may pay a premium for an insulated model which keeps drinks cool when they are sweltering in the sun. The premium paid for these additional features is usually much more than the minor additional cost of manufacturing them. Brand can also add value. Bump your product up a notch by packaging it differently. Bundle a service and present it in a well-designed, glossy brochure.
This value-based pricing model doesn’t have to be tied to the “real” cost of goods. Really high-end brands use it a lot. They know their customers are buying the pleasure of owning something they love and perhaps some bragging rights. This model is particularly suitable if you are offering something customers really want or which is not readily available elsewhere.
If in doubt about your price, start higher as dropping your price is much easier than increasing it. You could even launch your product or service with an “introductory special” for a limited time to test the market. It’s better to add value than slash the price if your products or services have been too expensive. Selling two for one or giving away a small additional item usually works a treat.
Pricing your product or service is never easy but it’s fundamental to the profitability of your business to get it right. Do your homework, set a price, be creative with your offer, and monitor the response. That way most of the guesswork will be eliminated.