How can I figure out how much to charge for my product or service? What is the highest salary (raise) I can ask for? Talking about money is a thorny issue. Everyone has opinions about it but those underlying concerns are:
Did I set the price so high that no one will buy? (Is the salary I asked for so outrageous that they will hire someone else)
Did I give them such a low price that they question my value or did I leave money on the table? (Is the salary I asked for so low that they wonder if I know what is going on in my field?)
This month I had three different experiences that involved pricing.
First my mother showed me a pair of shoes that she got through Medicare. (She is a diabetic and evidently Medicare will pay for one pair of shoes a year.) She told me she would never order them again. Why? Because the doctor charged Medicare $500 for the shoes and she thought that was far too much money. (She watches the government’s money like her own!)
Next a friend told me most of her colleagues were telling her to charge more for her services. She was adamant in her stance that no one was worth what they were telling her to charge. In fact her colleagues were in the same business and commanding the fee they were recommending to her.
Finally in the news once again one of the presidents of a large company here in the US (Exxon) was reported to have negotiated a huge retirement package.
Finding an appropriate price is not easy. There is a lot of psychology in pricing along with some mathematical computation. Sometimes people forget to think about the mathematical piece. The cost of delivering the product or service including the time of the deliverer is important. If you do compute your actual costs you can then add a percentage on top (margin) to give you your profit.
Seems simple but now you’ll need to see what others are providing. How does your product compare with those it competes with? This is the market research part of pricing. If you are negotiating salary for a job, you’ll want to know what others who do similar work get for that job.
Now here is where the psychological factors come in. Price something way above what the competitors charge and you could price yourself out of business – maybe or maybe not. Perhaps your product is like no other that it competes with. In my mother’s case maybe there is only one manufacturer of shoes for diabetics and each pair must be made individually to that person’s specifications? The price may in fact be justified.
Price something way below what the competitor’s charge and it is possible you will be very busy. If you haven’t done the cost analysis, you may find yourself losing money though. Another possibility is that potential customers may question your value. “Why are you so cheap?”
Justification – that is what is necessary. In your sales pitch you will need to tell the potential buyer what makes your product so special. (Why you do charge so much or so little.) If my friend doesn’t really believe that she is worth more than she’ll have a hard time convincing others that she is. Clearly Presidents of large corporations have no problem with their sales pitch and are really good at convincing boards of directors to pay them huge sums.
“Whatever the market will bear” is often the philosophy you hear. It certainly must be the justification of the presidents and CEOs who get big salaries, bonuses and pensions. In my opinion the answer lies somewhere between my friend who doesn’t think she is worth that much and the big company pay outs. That is a place where the business owner gets what he/she is worth and the consumer gets the value he/she expects. For me there is also integrity involved in pricing not just what the market will bear.
Take Action 1. Assess your own work situation. Where are you undervaluing yourself? Write down a list of the benefits you offer to your customer (employer).
2. Check your competitors. What do they offer? How do they price their offer? Compare their offer to yours. How are they alike? What is unique about your offer? How do you tell your customers about that uniqueness?
3. Not unique? Why would your customers choose you instead of your competitors? If your uniqueness is price alone, you are on a slippery slope because there are always others ready to price below you.
To learn more about this author, visit Alvah Parker's Website.
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