How To Price Your Product Or Service.

This is a huge issue and it attracts much debate. Here is the typical analysis: It cost me x dollars per month to run my business. My costs for producing the product are y. I want a 20% margin and I expect to sell 1000 units per month, thus I compute my price to be $100 (or whatever it works out to be). This is certainly one way, perhaps a good starting point but not the final analysis.

Some small business owners take another approach, adding in “what I need to live” and thus marking up prices to adequately to provide the desired revenue stream.

Then, there is the competitive marketplace, what other competitors are charging for similar goods. “Maybe I should be competitive,” the small business owner thinks. A valuable and important consideration.

Then there is the juggling… “If I am too high I will lose share of market although I will be profitable. If I am too low I may gain volume but may not earn adequately to satisfy my needs.” What do you do?

It’s a great question. While there are no definitive answers, there are a few guidelines to consider:

1. What will the market pay? This can be influenced as there is always a spread, based on perceived quality and value and the marketing effort, but the spread is also controlled by what the market will pay.

2. Come in too high and you will price yourself out of the market all together, although, it is easier to come down than go up. On the other hand, there are always buyers who want the high-end of anything they purchase. Know your customer, understand what their preferences are and market to them. You cannot be everything to everybody but high-end is always a viable choice if it fits your product or service.

3. Come in too low and you will be perceived as the cheap alternative. That may not be how you want to be known in your market.

The real point here is that the market will determine what your price will be. Pay attention to who your market is, what they are saying to you, and then deliver it. Perceived value, quality and the entire package is to be considered. What position in the marketplace do you want to occupy and be known for? High-end and high quality with a perceived value, or low-end and cheap?

Figuring it all out is part science, part art, but it’s important to remember that it’s driven by the marketplace, not by your internal needs and desires. Figure out your best position. It’s a tough analysis, but it must be done.