As a start-up business, establishing appropriate prices is critical to your early success. If your prices are too high, sales will suffer and many potential customers will be alienated--perhaps permanently.
Pricing products or services too low--a temptation for many start-ups--not only impacts profits but also may preclude business from corporations and others seeking quality. Also, if your clientele is attracted by low introductory prices, what will become of that customer base once you adjust prices to market levels?
The solution? Many entrepreneurs study the market to determine what competitors charge for the same products and services. Then they set their prices somewhere in the middle range.
If yours is a specialty business or one that provides premium services--such as the upscale Best Friends Pet Resorts & Salons, you might want to take a tip from Dan Charleton, chief marketing officer for the Norwalk, Connecticut-based chain that began franchising last year.
"The first thing any pricing planner needs to do is gain a thorough understanding of who the customer is demographically," says Charleton. "If you don't know that, you can't understand who they are economically. For example, if you are starting a business, ask yourself these questions: Who are your likely competitors? What is their customer base?"
"Costs are secondary in establishing prices," adds Charleton, who has applied the same principles in establishing retail pricing for TCBY Treats, Acapulco Restaurants Inc., Denny's Inc. and Wendy's International Inc. during management stints with each chain. "Your primary consideration is the volume that can be [generated] from a satisfied customer at a given price. You must understand what the market will bear for your product or service. Do a thorough job of analyzing who the customers are, what their expectations are and how price fits into their perception of value. And recognize that price selection is relative and constantly changing."