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How do I set my price?

Written by: Chala Dincoy

Article Overview: Small business owners, especially at startup ponder this very question often: How do I decide what my price is. In this article, learn a step by step process of looking at your own costs as well as the market and specifically your competitors to set the right price.

How do I set my price?

Most small business owners will agree that pricing is one of the most critical factors of any product or service’s success in the marketplace.

It is also often the most confusing question for my clients who own small businesses.

Pricing, I’ve found is more a science and a process rather than an art—you need to do your homework before establishing the right one.

What exactly is that homework? Here are the steps:

1. Who are you?
In other words, what is your brand strategy? (see previous article about how to establish this through a ‘brand character’).

For example, if your product is the Sharon Stone (for car lover’s let’s give another example—a Rolls Royce) of your industry, you’ll have a much higher price than your competitors versus if it’s a Britney Spears (Neon).

Your price must be aligned to what is the positioning of your product or service. Otherwise people won’t understand why you’re charging too much for a Britney Spears or too little for a Sharon Stone.

2. What are your costs?
This is something that a surprising number of small businesses are rather nebulous about. Your calculated costs should include everything from:
 your own hourly labour cost at a standard industry rate (i.e. If you were to retire tomorrow, how much would you have to pay someone to do the same job as you?)
 raw materials of the product or service you’re producing
 transportation, customs fees etc. other costs related to the business
 fixed costs such as rent, electricity etc. directly or indirectly associated to producing the product or service.

This step is absolutely critical to the whole process of pricing and you need to be as accurate in this step as you can.

3. What is the average industry mark-up percentage?

Mark-up is a term used to define the profit as a portion of the sales price. Therefore it’s figured out by dividing your profit by your sales price.
I.e. (Sales price-Cost=Profit)/Sales Price is your margin.

Knowing what the standard mark-up in the industry will give you a starting place to position your own price in the marketplace.

And how will you go about finding such delicate information about other companies, you ask? Through a very powerful and effective tool called ‘Informational Interviews’, of course.

Informational Interviews (II’s) are simply posing industry related questions to people (often strangers or sometimes referrals) who own similar businesses in non-competing markets or sectors for the sheer benefit of gaining information.

For example, you can hold an II with an ad agency who specializes in pharmaceutical companies if you specialize in packaged goods companies and want to ask them about their margins on printing brochures. Chances are that since you don’t compete with them, they’ll help you with the information you need and that the margins in their market are similar to yours.

II’s will provide you with lots of critical information you need to help your business grow.

What price do you get when you put the standard industry markup on top of your cost (from Step2)?

4. What prices are your nearest competitors charging?

Take a look at similar sized companies with similar brand strategies and products who operate in the same industry as you. If you’re within the same range, then your pricing is a competitive one.

If your marked-up price (from Step3) is less than your competitors, increase at least to their level. If you’re marked-up price is higher than your peers for a similar quality of product or service, look at reducing your costs and thereby your prices. I.e. Can you get cheaper materials or pay less for your couriers or rent etc?

5. Will the market bear your price?
Ask a representative group of your buyers or customers if they would be willing to pay this price for the product or service you’re supplying.

Again, if you frame this as an II question rather than a sales pitch, you will get helpful answers to steer you in the right direction.

Once you have the right price, test it in the market to see if anyone is truly buying it and how the sales are going. If there’s a lack of response to your price in the market or you start to lose sales after a rise in your prices, you need to re-examine either your product design, quality or your competitors to see how you can keep on top of the game.

What I want for all of you is to be swimming in new business because you’ve got the right price, product and distribution channels. But it all starts with price.

With kindness as always,
Chala

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Related Forum Posts
Re: Matching competitors prices - beware - While I agree that getting into a price war should be avoided if possible... on rare occasions, it's not a bad idea to match someone's price (or even beat it) if you're doing it "one time" to land a new customer. For instance, I was recently looking for the best price on a [u:2rhwa2wg]specific[/u:2rhwa2wg] flight to NY and a customer service rep from Flight Centre ended up taking zero commission to help me book my flight. In fact, she even beat the price by $5 in the hopes of creating brand loyalty for the future.
Re: need pricing help please - I think you could be selling yourself short. Plus you may be focused on the wrong things when it comes to pricing your products. What will your buyers be able to do or get as a result of your product? How much would that be worth to them? Buyers will gladly pay over $100 for a one page report because it tells them exactly what to do to overcome a specific difficult to solve problem. Even when that information can be found free elsewhere. I know it's hard not to compare your eBook to a physical book. Yet, that may not be a fair comparison. Another thing to consider is the perceived value when a product that sounds great comes with a very low price. Some potential buyers will doubt the value of your product because the price seems way too low for the result it promises. There's a quick and easy way for you to discover the right price though. Open a Google Adwords account ($5) and then set-up a multi-variant test for different price points. If you have a decent amount of traffic you'll quickly discover the best price.
Can consumers reduce the price of gas? - Hi Everyone, I just wanted to get your opinion on someone's suggestion that we as consumers can actually reduce the price of gas if we were to simply stop supporting the two biggest companies, Esso and Shell. The logic behind this "price war" theory is that if no one buys Esso and Shell gas, then they'll be forced to lower their prices and then the other smaller companies will follow suit as well. Is this a myth or is there actually any truth to this gas price reducing strategy?
Re: E-Commerce Spending Down? - Spending might be down, but there's still plenty of spending being done. Only a 2% decrease is hardly anything to worry about. As Kevin pointed out, I've noticed eBay sellers offering free shipping, but increasing the starting cost or Buy It Now price. So, in reality you're still paying for the shipping. I'm one who likes to buy online, mainly because it's a lot easier and I don't have to deal with the mad rush at malls and shopping centers. I'll shop around for the best price online, mainly looking at eBay or Amazon. However, if I happen to get into a crunch, then I'll just suck it up and go to the store and pay full price. Sometimes you just have to, but I try to avoid that situation. As Kevin also mentioned about shipping prices on eBay, I, too, have noticed that some sellers really inflate the price, even for US shipping. I avoid those sellers unless I can still get it cheaper through them than someone else, but most of the time you won't. It doesn't make any sense, and I would hate being out of the country and getting completely ripped off.
eBay Shipping Rates - Unfortunately a lot of sellers on eBay are selling low cost products but making up the low price with extraordinary shipping prices. You just have to be aware of how much you're paying for shipping and whether the total price is still a good value.


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