Setting Prices
Determine your costs. The cost for each of your goods or services should ideally be set to cover all material, overhead, and human costs that factor into the production of that good or service. Keep in mind that some costs are fixed (like rent), while some are variable (such as shipping or fuel costs). Production costs to keep in mind may include: Labor (including salaries of any workers) Overhead costs (rent, utilities) Debt (money owed on business loans, for example) Capital costs (equipment you need, as well as funds to set aside for maintenance and upkeep) Costs of any materials needed to produce your product.
Conduct pricing research. You can get a general idea of prices to set for goods/services based on the prices your competitors set for equivalent goods/services. Pricing research takes time and may even cost you some money initially, but in the long run the information it provides is very valuable. You can research prices in various ways: Check sales websites online to see what competitors charge for equivalent goods and services. Keep in mind that even when customers buy products or services in person, they may shop around online first. When your customers purchase a good or service, ask them if they thought the price was fair using a customer comment card, emailed survey, online poll, etc. Check on your competitors’ prices by anonymously calling them and asking, or by using secret shoppers to do the same. Enlist the services of a third-party market research company. While this may be expensive, market research experts can provide critical information to help set prices.
Know your market. Before you start setting your prices, think about the community in which you have your business. You should position your business as providing a certain market share. Market positioning is especially important if you have many competitors. Some of the questions you need to think about before you decide on prices are: What kind of market position do you want? Do you want to be known as the provider of exclusive goods/services, or do you want to be positioned for the average or budget-conscious consumer? What kind of competition will your business have? How is the competition positioned? What is your target customer like (demographics, salary, disposable income, buying habits, etc.)? How will your customers understand the relationship between quality and price? How will they know that you are a budget-friendly choice, or a luxury one, for example? Are there regional differences should you factor in? Goods and services can have different prices in different areas of the country, based on demand, production costs, taxes, etc. For instance, costs for granite monuments may be lower in Georgia, since large amounts of the stone are mined there and delivery costs may be lower.
Avoid underpricing. Many businesses are tempted to set their prices lower than competitors', thinking that this will encourage more customers to buy their products or services. However, this plan might backfire, for two primary reasons. First, customers might see your products/services as cheap and lower in quality than competitors’. Second, you might not be able to cover your costs and/or make profits to keep your business going and growing. For example, imagine you are producing shoes: Your monthly production costs are $4000. Selling 100 pairs of shoes at $40 apiece, or 160 pairs at $25 apiece would only just cover your profits. Selling 100 pairs of shoes at $45 apiece would leave you with a profit of $500 ($45 x 100 = $4500). Selling 160 pairs of shoes at $30 apiece would leave you with a profit of $800 ($30 x 160 = $4800).
Don’t overprice. Alternatively, if you set your prices too high, customers might be unable or unwilling to pay for your goods/services. As a result, you may struggle to make a profit or even break even. If you are producing shoes for the everyday consumer and want to charge $130 for each pair, while the average price in your market is only $45, customers may flock to your competitors. Some businesses make the mistake of setting prices that are initially too high because they are worried about making enough money when they start up. Don’t expect your business to necessarily be profitable right away. Instead, give your customer base and sales time to grow and catch up with your costs.
Decide what you need to make. After you determine your costs and have a good understanding of your market, you can calculate your expected profit margin. The basic formula for determining profit is simple: sales – costs = profit. However, there are potentially many variables to consider. Use market research to determine your competitors’ profit margins, and use this information as a guide to set your own goal. Set a profit margin that will still keep your prices reasonable. Allow your profit margins to grow over time. Your target may be 10%, but you may not be able to make that right away. Start more modestly (3-4%), and work on increasing it after you develop a customer base and sales.
Creating a Price List
Make a list of the goods or services you sell. This should be an exhaustive list so that your employees know exactly what to charge. If you sell different products in different areas, create multiple lists for the different regions you cover.
Decide if your list reflects standardized or tailored prices. Some businesses, such as retail operations, may set a price for each product that stays the same no matter who the customer is. Other business haves prices that vary based on the customer project, and offer estimated price lists. Estimated price lists are often used for services. For example, a house painter may estimate $2000 to paint a single story house, and $3000 to paint a two-story house. Likewise, the business might charge higher than these estimates to paint a house in a custom color. If you provide estimated price lists, make sure customers have an idea of the “worst-case scenario” price, to that they are not shocked. In addition, set an expiry date on the cost estimates.
Format your list. Price lists are typically set up using a tabular form. Each of your products/services should be listed alongside its price. Any other important information, such as shipping costs that are in addition to the base price of a product, should also be included on the price list. In addition, consider: Arranging items in your list by alphabetical order to make them easy for you and your customers to find. Providing prices that match how your customers will need your product. For instance, if you are selling lumber, your prices might be listed by the board foot. Dividing products into categories if you have many of them. For instance, a construction supply company might have one list of prices for “lumber,” another for “hardware,” etc. Providing each item’s price with and without tax, if applicable. Organizing your price list by level, if applicable. For instance, a financial planning company might have one price package that includes tax preparation and retirement planning, and a higher-tier package that includes estate planning in addition to these other services. Make sure that the price for each item in the package is provided. Explain and provide prices for any add-on products or services. For instance, if you are selling electronics, you might provide a base price for each product, and another price for the product plus an extended warranty.
Share your price list with customers. Once you have developed a price list, customers will appreciate being able to reference it. Share it via your website and/or make it available via print or email. In particular, make sure that your regular customers have your price list, and send them a new one any time there is an update.
Prepare written estimates as needed. You and your customers can reference your price list as needed. However, you can also use the list as a guide to develop written estimates for services, as needed. Make sure to get a written confirmation from your customer acknowledging that the estimate is understood, and include information such as: The overall price as well as component costs (including labor, shipping, etc.) How long the estimate is good for A schedule for services or delivery Payment terms or conditions Your contact details
Date each list or estimate. It’s important to date your price list or estimate with the time frame it will be relevant because some customers might keep it for a while. As inflation and prices go up, you will need to update your prices, and the relevant dates. The Federal Reserve estimates an average inflation of about 2% over time. Make sure to account for inflation over time when determining your prices. The Bureau of Labor Statistics has developed a Consumer Price Index (CPI) inflation calendar that you can use as a guide. You may wish to put a note on your price list stating something like “Prices subject to change.”
Use software or a service. Many business and personal office software programs have templates for preparing a price list. There may also be services in your area that you can contract to prepare and format a price list for you. These methods can be time-saving, but an additional cost.
Adjusting Your Prices
Monitor your metrics. It is very important to keep track of your sales figures in order to continue insuring that your price list makes sense. Keep track of the number of customers you have and the products moved to ensure you are selling adequately. For instance: If you have 1000 people come in your shoe store in a month, and you only sell 100 pairs of shoes, that means you are only selling your product at a rate of 1 in 10 customers. Aim for aggregate growth. If you want to have a certain profit, but are falling short of it, consider discounting your product slightly (perhaps 10-20%). You might sell more shoes at $36 a pair than at $40 a pair, for instance, more than making up for the difference in price and leaving you with a higher profit in the end. Don’t neglect the importance of psychology when determining prices. Some studies show that people are more likely to buy a product that costs $3.99 than the same product when it costs $4.00, for instance. A slightly lower price may mean larger aggregate sale revenue.
Test new offers. To boost your sales and increase your customer base, you may want to try sales, coupons, and other special offers from time to time. Check sales volume afterwards using receipts or credit accounts. If the offer has increased your aggregate sales, you may want to offer it regularly or permanently. Any long-term specials can also be written on your price list.
Lower prices sparingly. Simply cutting your prices is not necessarily the best way to increase sales. Keep in mind that you want customers to see the value of your product or service. There are alternatives to lowering prices that may be more beneficial to sales: You may be able to offer less for the same price, reducing your costs per sale. For instance, if you are selling packaged foods, you may be able to reduce the portion size. You may be able to limit services. For instance, if you are selling auto parts, you may decide to offer more limited warranty or maintenance packages. You can research to find lower cost suppliers for your product components, reducing your production costs and increasing your potential profit margin.
Raise prices over longer periods of time, and according to a strategic plan. You may need to raise your prices for various reasons (production costs, inflation, profit margins, etc.). If you raise your prices too quickly however, you may shock and drive away customers. Instead, raise prices gradually and strategically, and no more than 5-10 percent at a time. Customers will accept three 5% price hikes over a period of 3 years more readily than a one-time 15% hike. Customers are more likely to accept price increases during good economic times. Continue to conduct market research to stay abreast of the way your competitors are pricing their goods and services.
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