For a small business, pricing products and services can be a difficult task. Figuring out your costs can be challenging, but you’ll also need to take into consideration profits, competition, value, and brand image, as well as how you want to position yourself in the marketplace.
Pricing communicates quality, says Bryan Ziegler, director of the Small Business Development Center at Indian Hills Community College in Ottumwa, Iowa, which offers free advice to small businesses in the region.
Often, entrepreneurs tell Ziegler that they are starting a new business that will be of better quality and that will have lower prices than the competition. “To me that’s wrong or backwards,” he says. “If you have better quality, one of the ways to communicate quality to customers is through a higher price…. Low price communicates low value.”
People often will purchase services even if the price is higher because they want a high-quality product or better service, Ziegler says. The Iowa Small Business Development Center offers a useful tip sheet titled “How To Price Your Products and Services,” which includes tips for determining costs and assessing your competitive position.
It’s important to research the competition, says Mary Lysaught, a SCORE mentor with an extensive background in marketing. SCORE, a nonprofit association that helps small businesses grow through education and mentorship, offers free or low-cost programs and advice to small businesses.
“I want [entrepreneurs] to focus on the competition,” Lysaught says. “I want them to know their competitors just like they know themselves. Whether it’s privately held or whether it’s publicly held, we give them tools to search as deeply as they possibly can on all aspects of that competitor, not just pricing.”
After researching the competition, it’s important to think about your desired brand image and quality, says Lysaught. “We look at positioning strongly. When you look at positioning versus your competition in an open marketplace, the [brand] image has got to be there. That image sometimes drives the level of pricing that you’re shooting at.” In addition, Lysaught emphasizes the synergy of the “4 Ps”—product, place, pricing, and promotion.
To determine a price for your product or services, you’ll need to first capture your costs. “Be conservatively low on the volume you might sell and a little high on [estimating] overhead, so you have the ability to cover all costs,” Ziegler says.
For services, figure out an hourly rate and how many hours a specific job will take, and then convert that into flat per-project fees, Ziegler advises. “Many people start out thinking they should charge by the hour. I try to get people to think about charging by the job. You actually can create more revenue,” he says.
Some suggestions to help you get the price right:
Determine your expenses. If you are selling a retail product, your expenses include the material and manufacturing costs to produce the product, as well as labor costs.
Calculate your overhead. Overhead expenses include office equipment and furniture, rent and utilities, advertising, telephone expenses, supplies, vehicles, liability insurance, medical insurance, and taxes.
Set a profit margin. You’re entitled to earn a profit over your salary and expenses. While there is no standard profit percentage, a 10 percent to 20 percent profit is common.
Adjust prices as necessary. Your price does not need to be set in stone. Keep track of your expenses, sales, and overhead costs. Once you’ve gone through a trial period and your experience builds, you may be able to reduce your costs and prices. Or you may need to increase them over time because of inflation or industry trends.
- Set your price above the competition. Small businesses can sometimes justify charging a higher price because of better quality and better service. If your price is above the competition, make sure your marketing materials reflect that higher quality and higher satisfaction as well as personalized service.
- Set your price below the competition. If you have a low-end competitive pricing strategy, reduce your costs by closely controlling inventory, limiting product lines, and offering limited services. Be aware that you must constantly monitor and adjust costs, which can expose your business to pricing wars.
A Chicago-based writer and editor, Eve Becker writes about personal finance, health and other topics. She is a former managing editor of Tribune Media Services.