Going too low or high can backfire in long run.
Deciding how much to charge for a product or service is a common question among small-business owners. Developing a pricing strategy depends on several factors: the type of product or service, the costs to provide it, your anticipated profit and the average rate for your industry.
This makes finding the answer tricky. Getting the right balance among all of the factors involved is more an art than a science. Pricing too low can cut into your profits, while overpricing also can hurt your business.
A common misstep — especially in the early stages of forming a business — is pricing too low in order to attract customers. While special deals can work in some cases to get started, going low is not always the best path. Low prices might draw customers interested only in price. They are the ones most likely to abandon you the moment they find something even lower elsewhere.
Selecting excessively low pricing levels to attract clients is even more dangerous for service businesses. You only have so many hours to sell. Your business can’t make it up in volume the same as a retailer who still profits from lower prices if volume is high enough.
Pricing is partly psychological. You will want to set your levels according to the perception of your product or service ”brand.” If you want to be in the premium neighborhood, your pricing can be higher to match an upscale image.
Pay attention to price points. They differ widely by product and industry.
Pricing is an ongoing process, so test your pricing periodically. You might need to adapt to changing conditions. Competitor prices, your own costs, customer perceptions and your profit expectations can all change. Or you might simply want to test different pricing levels to see what works best.
Research the norms for your industry, including price ranges across the country if you sell nationwide. You might want to charge more or less, depending on your brand positioning.
Make sure you use timely and accurate information to calculate your costs for labor, supplies and direct and indirect overhead for every product or service you offer.
”Guesstimates” are not good enough and might cost you far more than the hour or two of research. Also, take into account seasonal fluctuations that might cause short-term increases.