Pricing your products and services can be difficult. If you set your prices too low, you may not cover your costs. If your sales prices are too high, you may not make the volume of sales that you need to be profitable. Here are ten tips to help you get the price right for your products or services.

1. Begin with the Basic Numbers

Your first step when deciding on the price to charge will be your direct costs. These are the expenses that you pay for materials and labor to create your produce.  If you are selling a product, you will need to work out how much the product will cost to manufacture, buy, or fabricate. If you are selling a time-based service, you will need to know how much the time of the individuals who will provide the service will cost.

2. Calculate Your Overheads

The next number you will need to know is the cost of your overheads. Overheads are expenses that all businesses have that are required to be in business.  The cost of the telephone is an example of an overhead.  If you have office space and pay rent, this is another example of an overhead.  The profit calculated in step one must be high enough to cover your overheads so that you can break even or make a profit. You will also need to consider how your pricing will affect demand. You are going to need to run a few what-if scenarios to be able to calculate the optimum price.

3. Consider Scarce Resources

If you can only produce a limited number of your products every month, then you will need to factor that into your pricing calculation. If you are making a product yourself, then there will be a limit to how many items you can make. If you are selling your time, then you will only have a limited number of productive hours available in a month. The number of units that it is possible to sell must make you a profit.  Your pricing will need to reflect that.

4. Research Your Direct Competition

Whatever type of product or service you sell, you will be competing with other businesses. You will need to know the price at which other companies are marketing the same or similar products. You may be offering a significantly higher quality product than your competitors, in which case you can justify a higher price. However, there will still be a price point at which you will be unable to compete if you go too high.

5. Research Your Indirect Competition

You will also need to understand what alternatives people have. You will need to look at the pricing of your indirect competitors as well. If you sell products from a physical store, you will need to research what other stores in your area are charging. You also need to look at the prices of online competitors.

6. Understand Your Target Market

Your pricing must be at the right level for your target market. The target market are your most likely customers.  You will need to investigate the demographics of your potential customers. You need to know who your customers are to get your marketing right. If you are selling to consumers, you need to consider the level of disposable income they will have. If you are selling a business to business (B2B) product or service, the size of the companies that you are targeting will impact the price that you can charge.

7. Position Yourself in the Market

Don’t always assume that you must beat the competition on price alone. The quality of your product and the level of customer service you provide will also impact the price you can charge. When you are setting your selling prices, consider how you want to position your business in the marketplace. Do you want to be a no-frills, cut-price supplier? Do you want to set yourself at the top end of the market? The price that you charge for your products or service will play a significant role in how people perceive the quality of your offering.

8. Tier Pricing for Volume and Upsells

Applying a fixed mark-up to all your products is not always a practical approach to pricing. You might, for example, want to charge a higher unit price for a single item purchase than you do for a multi-pack of your products. If you are selling a time-based service, you might want to consider offering a discount based on the number of days or hours your clients buy. In some cases, you may want to provide a low price on one product and get a higher margin on upsells. If you were selling a software package, for example, you might want to sell the software itself at a low price and charge a higher fee for the consulting and training.

9. Differentiate Your Products for Different Markets

You may also want to consider charging different prices on the same product for various target markets. A single product could be repackaged and sold for several purposes or in several target markets. Lower pricing for some types of customers may give you a marketing edge. In a consumer market, lower prices for seniors and veterans will be appreciated by the customers. The low prices may also increase the overall demand for your products. In a B2B market, discounts for charitable and educational organizations could also have the same beneficial effect.

10. Test Your Pricing Assumptions

Once you have considered the above and have crunched the numbers, it will be time to test your pricing assumptions. Remember, asking your friends what they would be willing to pay for products or services is not going to tell you if you got it right. You will need to test your pricing out on real customers and then be prepared to modify your prices if required.

Conclusion

As you can see from the above, there are lots of factors to take into consideration when pricing your products. It is not wise to take short cuts with your pricing calculations, and it is not advisable to take the easy route of merely setting all your prices lower than your competitors. Crunch the numbers on a spreadsheet before you come to a pricing decision. Sometimes a higher price and lower demand will earn you more profit than high-volume sales will.