How Do You Set Prices for Your Products and Services?

August 15, 2011 · 0 comments

in Finances,Profit

Question from Alicia Terry on Linked In. She also asked, “What is your biggest challenge in setting your price?”

Set prices using two different methods:

A. What the market will let you charge, e.g., competitors

B. What costs you must cover, plus a profit margin

If A > B, charge A

If B > A, then go back to the drawing board. Perhaps you can redesign your product or service so that you can sell it profitably at the price point the market will allow.

Or perhaps you need to promote it in a way that will justify the higher price in the eyes of your target customers.

Many entrepreneurs fail to include all relevant costs when setting prices. Items often neglected: Markup on direct labor, sales commissions, freight costs, damaged goods, warranty work, project management. And #1: the value of the time put in on the job by the owner!

Small business owners underprice. They’re notorious for this. “I’m new, so I’ll offer more for a lower price.” You can’t compete this way with larger, better-capitalized competitors. It’s the route to bankruptcy.

In many fields, if you price too low, people don’t take you seriously. “Is that all he’s charging? He can’t be much good!” Charge at least what your larger competitors are charging, and demonstrate to customers why you are worth it, since you are better.

For small service businesses, look for clients who know the value of their time. If you can save them time, they are willing to pay more for that. Turnkey, troublefree, flexible, responsive–these are the things I will pay extra for. And of course friendly, personal service.

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