Don’t Guess When it Comes To Pricing Your Products.
Pricing your product and/or services can be one of the most challenging…and important…tasks that a small business owner does. Get the pricing right, and you can sail your company into financial success. Get the pricing wrong, and you could be facing bankruptcy.
Given the importance of pricing, you’d think that business owners would turn to an expert to help them get this right. Unfortunately that is not the case.
Here’s what many business owners do instead: Throw a dart at a dart board, and wherever that dart lands, that’s the price of their product. Ok I’m joking, but essentially that’s what business owners really do – guess what they “think” they should charge for their product / service. This is clearly a recipe for disaster.
There is a scientific, two-prong approach to determining your prices, using both your financial data and marketing analysis.
The financial standpoint involves taking an accurate measurement of ALL the direct costs you incur to produce your product or service. For a product, this includes the cost of any raw materials, labor to convert the materials into a finished product, purchased goods that you will resale, etc. For services, this mostly includes the cost of labor for the workers that deliver the service.
Once you know the costs…double it! And that’s what you set your prices to be. Essentially your prices should be about 2x what it takes for you to produce it. Some industries are a bit higher, and some industries are a bit lower. But a good rule of thumb is to be in the ballpark of 2x your cost.
After you determine what your price should be from the financial standpoint, then you can use the marketing standpoint to massage the price. Analyze what your competitors are charging for the same or similar product / service, and use this information to tweak your pricing up or down accordingly.
BUT…a warning…If your prices are higher than your competitor, you may be tempted to decrease your prices to match theirs. That could be a fatal move, since your financially calculated prices are determined to ensure that you are profitable. If you deviate too much from this bench price, then you could set yourself up for failure.
Setting your prices is arguably the most important task you will perform in the lifetime of your business. This exercise can truly set up your business for long-term success, or inevitable failure. Don’t guess…and don’t get it wrong. Contact us today and we can help you determine what your prices should be to keep you profitable. Schedule a free consultation with us and let’s chat!