Whether you’re fresh to small business entrepreneurship or an experienced manager, when you’re starting a new small business, setting the correct prices for your goods and services can be of crucial importance for your business endeavor. One of the secrets to business success is knowing how to price your products properly. This can make all the difference between whether you succeed or fail. As Charles Toftoy, associate professor of management science at George Washington University eloquently puts it, this skill is “part art and part science”. With that in mind, below are a few guidelines for pricing your goods and services correctly.
Know the Key Factors
First and foremost, before setting a price for your product, you have to make sure that you know the costs of running your business. If the final price doesn’t cover the inflicted costs, you will lose money – at this point, it simply becomes a question of time before your business fails. When you calculate all the costs of production and marketing, the most straightforward method is the cost-plus pricing, which simply means that you must add the percentage that represents your desired profit to total running costs (such as labor, materials and overhead costs), and that’s what you charge to your customers.
It is important to know that, when it comes to small business pricing, there are no fixed rules. Even though the science of economics enumerates many different methods of pricing, the way you charge for your goods and services ultimately depends on many different factors, such as target customers, the prices of your competitors, and the complex relation between quality and price. All this is good news, because it means that you’ve got a lot of flexibility in setting your prices.
General Advice & Important Questions
What are your competitors charging? This is a key question. If you charge too much above the market price established by your competitors, you risk a swift failure. On the other hand, if you set your prices too low, you can start a “price war” and ultimately generate profits that are much lower than they could be.
Remember – never try to compete with large store prices. These stores by their goods in large quantities; consequentially, their price-per-unit is much smaller than a small business owner could hope to achieve. When competing with these stores, do not try to beat them in terms of quantity and pricing. Instead, focus on things like quality and customer service. Here is a video showing you why you shouldn’t compete on price.
What is the current state of your market and the overall economy? The situation on the market is always changing, and you must be familiar with the changes in your industry and the economy as a whole when you plan new products and services. It is imperative that you understand the marketplace so that you can continue to make correct decisions.