Are You Charging Enough? A Quick Guide to Pricing What You Sellby Sean Morrow Published in Getting Started on
Pricing is one of the most important things to set when you’re creating a new product or service.
Not only is it a huge determining factor in your profits, but it is also vital to how a customer perceives you, and if they’ll do business with you at all.
But pricing is tough– you have to keep your margins high enough to turn a profit, while also keeping the price low enough to draw in customers.
Here’s a quick how-to on pricing for small businesses:
What Are Your Competitors Charging?
Scope out your competition and see how much they’re charging. When I was in charge of sales at La Esquina Food Products, a salsa company, I physically went into gourmet and natural food stores and looked at the prices of our competing salsas.
I did this when originally pricing the salsas, and when pricing the product for sales to new chains, distributors, and stores.
When were developing a new product, barbecue sauce, and I had a manufacturing price, I went into stores to look at retail prices to see if the stated manufacturing price would keep the price low enough to be competitive and still turn a profit.
If you’re running an internet business, it’s even easier to research products. If your product is a service, then there are more variables in your comparison.
So before you even begin, you have to make sure you have all your information. How much are people willing to spend on goods and services similar to yours? How low of a price point do you need to hit to stay competitive? How much do you need to charge to be profitable?
Remember that just because a price is set, doesn’t mean people are buying it. Make sure to research sales figures for your competitors as well.
Calculate How Much You’re Spending
Figure out the cost of the product to you. This includes everything from raw materials to your time to insurance and storage space.
This base cost will be how you will begin figuring out your pricing.
Iowa Small Business Development Centers provide this helpful three point system for figuring out what the total cost of your product is:
- Material costs
- Labor costs, including salaries plus benefits
- Overhead costs. Any cost not readily identifiable with a particular product is overhead. Taxes, rent, insurance, marketing and transportation are all overhead. Part of the overhead costs must be allocated to each service performed or product produced and must be adjusted annually.”
Make Decisions Based on Your Buyers
Then you have to determine who you’re selling to.
- Who is your company directly selling to?
- Are buyers finding you online and purchasing directly?
- Do they come via referrals?
- Do you have a product that will be going to distributors and then to stores?
- Are you skipping the middle-man and selling straight to stores?
- Are you a service or restaurant working directly with customers?
- Will you be marketing towards higher end customers, bargain hunters, or somewhere in between?
Again, in my experience in the salsa industry, I found that my product could sell retail for anywhere from $3.99 to $8.00– the price literally doubles in some markets, so it really matters who you’re selling to.
Every step in between you and the final customer is going to add a little bit to the cost. If you see something in a store priced at $9.99, the manufacturer may have only gotten $3.00 for it.
A Simple Formula
A good way to get a base price for a product to be sold in stores is to multiply your gross cost by 1.5. This was standard in the natural foods industry where I worked, and applies to other consumer goods. Your customer, the store, will then multiply that by 1.5 to land at the retail price. If you’re a manufacturer you should consider setting your MSRP like this.
Figure out your price in a few ways: work from your cost to establish a price, and also work backwards from your desired MSRP to get the price you’ll sell to stores for.
If you provide a service, again work out how much you need to make, then work out how much you can get away with charging.
Yes, The EXACT Price Matters
Do you ever look at something priced $99.99 and wonder “who would actually think that’s cheaper than $100?”
The answer is ‘a lot of people.’ Charm prices, as prices with .99s are called, “increased sales by 24% versus their nearby, ’rounded’ price points,” according to William Poundstone, author of Priceless, an invaluable book for new entrepreneurs trying to navigate the waters of pricing.
The Psychology of Pricing
There is a lot of other psychology involved in pricing.
Some fun and interesting tricks that have been derived from tons of studies:
- If someone is buying something like aspirin, they may not go for the cheapest option, considering it unreliable. Is your product something that would benefit from the prestige of a higher price point?
- Some items at Chanel stores are priced ridiculously high just to create a sense of value for other products.
- Pricing of one product compared to your other products makes a big difference.
A study on the pricing of subscriptions to the a magazine showed that if you have three options: a web only subscription for $59, a print subscription for $129, and a web and print subscription for $129 the web and print subscription sells better than if you didn’t include the option of the print only subscription. Dan Ariely, the best-selling author and scientist who did the study, explains below:
Are You Charging Enough?
The United States Small Business Administration says:
Not charging enough is a common problem for small businesses simply because they often don’t have the operational efficiencies of larger companies and frequently find that, whatever they sell, their costs are higher than they anticipated.
Keep this in mind when setting your prices. Experiment with adding 5-10% above what you think you should be charging, and see where that lands you among your competitors.
Test It Out
Don’t decide it’s all over once you’ve picked out some preliminary prices. If you have a website, A/B test a number of prices and packages to see what works best for you. If you offer in-person services or sell products from a brick and mortar location, then don’t be afraid to adjust prices to test out what works.
Your Turn: How did you decide how to price your products? Did you have to make any adjustments?