Setting Prices for Products and Services
Setting Prices for Products and Services:
What should you charge? This is a very common problem for small business owners. You’re not quite sure what you should ask people to spend on doing business with you. This is especially challenging if you’re a new business owner, and you don’t even have a customer yet. There are lots of different analytical, deep methods to figuring out a pricing strategy. In this blog I want to share with you four quick tips that will get you started on the process. It’s not an exact science anyway.
Let’s assume that the average price for your product or service is ten dollars. The first that we can look at is cost. When you sell a product or service you do have to consider what are the costs involved. There are three different aspects of cost.
Number one is overhead. These are things that you’re going to have to spend money on regardless of how many products or services you make or sell, things like rent or utilities. Next is materials, this is a variable expense, meaning it will increase or decrease corresponding with the number of things that you offer. Then finally labor, if you’ve hired someone else to do work for you, you do have to pay them for that time to make it, or to deliver that service to someone.
We need to consider all of these different costs when pricing something. For instance, in that $10 example, if our overhead was $2 a month, and our materials are $2 per unit, and our labor is $2 per unit as well, then our profit would be $4 per unit.
Number two is quality. We can consider the quality of your product or service versus your competition. If they’re selling it for $10, and the experience you’re offering to customers is a little bit better, then perhaps we can charge $11, or if it’s a little bit worse we can charge $9. Whatever the difference in quality is that becomes a nice little reference point in comparison to competition.
The third thing that we can consider is how targeted are we toward our most valuable customer, that MVC. Our most valuable customer is the profile of the person who’s going to buy our products or services. If we sell our product and services to everyone, then we’re competing with everyone. But if we can be very targeted in our product or service, and we can craft the experience just toward that kind of customer, we actually can charge more.
For instance, let’s say I’m a graphic designer and I charge $10 per hour for my graphic design service; I know that’s low. What we could do is if we were a graphic designer for dentists, we could actually charger perhaps $30 or $40 dollars an hour. Why, because it’s so targeted.
Then finally, let’s talk about if you have a new business, or it’s a new product or service, you’ve never sold it before. What should we charge people? In that case, this is a great opportunity to do a casual survey. Talk to those people who would buy it, that most valuable customer. Ask them, what you be willing to spend for something like this. Their answers won’t be precise, but they’ll get you in the ballpark of where you can begin to price that product or service.
Pricing, as you can see is not an exact science. It’s not perfect, but hopefully this will give you a starting point to begin selling your product or service. Then over time you can make small adjustments to find that perfect price point.
