Many businesses do not periodically assess their pricing. In addition, sometimes existing businesses encounter pricing problems when introducing new products or services that are distinctly different from their current offerings. For small businesses that often do not have access to the tools that large companies have, pricing can be fraught with issues.
So, the questions are: “What should you charge for your goods and services?” and “How do you determine what is the best price?” Be aware that it’s not necessary to set the correct price from day one, as long as you are phasing in a product or service or doing a soft roll-out. Soft pricing allows you to do product and pricing testing with current and potential customers, which will provide you with the information and feedback you need to make appropriate adjustments. If you are doing heavy advertising and marketing, your pricing should be set.
Overcharging is easier to correct than undercharging.
Grossly undercharging for your goods or services can be very dangerous. Undercharging is significantly more dangerous to your business than overcharging. If your total cost of goods or services sold is not adequately reflected in your pricing, the gross margins you think you are booking will be erroneous. This will impact sales commissions and have a further trickle down effect on net income. If your pricing does not fully reflect your overhead burden, you could be digging a cash flow hole for yourself that you are not aware of. Or perhaps you have cash flow issues but never considered that your pricing could be the issue.
It’s relatively easy to reduce prices if you encounter a lot of customer resistance, assuming your costs are covered. You can offer one or more customers a discount for buying in bulk, paying in advance, or simply for being a great, repeat customer. You get the point. But how do you say, “Oh, by the way, I need to add to that price without offering you greater value.”? This is a much more difficult proposition that will typically encounter much more resistance. If you must do this to ensure your long-term viability because you made mistakes on your price, then you must. However, you must ensure you have corrected your pricing methodology and model so this doesn’t happen again. When you must raise prices without a good reason, you may drastically reduce your credibility with your customers.
Check out the competitor pricing.
To help you decide what to charge, determine what your competitors are charging. Obtain a price list from their websites or a distributor’s website. Alternatively, if the price list is not readily available, have an employee pose as a customer and call and request one. If you believe this behavior is dishonest or you have to provide too much information to obtain the pricing, then find competitors in other geographic areas and contact them. You will not be a threat to them since you are not competing directly. An additional benefit to this latter suggestion is that you could find a partner or a company that you can refer business to when the customer is outside your geographic area or area of expertise.
Check out associations.
Sometimes business and trade associations have pricing information. Contact them and request the information. If you provide a product or service to the government, the winning bid is public information. Go online and search by NAICS code and key words for your good or service. Assess the pricing that was included in those bids.
Consumer-focused pricing information is relatively easy to find.
The information provided above primarily pertains to business-to-business transactions. If you provide a consumer-focused good or service, the competitor information is readily available. Have your sales or marketing personnel spend time visiting retail or online locations and collecting pricing information from those stores that serve your demographic.
Competitor pricing research is key to setting pricing. Your cost structure is critical but once you determine what your break-even is and what your target margins are, the market information should be used to decide your final pricing. If you cannot operate at those prices, you need to modify operations to lower your cost structure or sell a different product or service. You can also add additional value to your product or service and thus differentiate your company from your competitors, which will allow you to charge much more. In reverse, determine the price from market data, then calculate how much you need to sell in order to break even. Then put a structure in place to go do just that.