Setting prices can be a very challenging part of running a successful business. You want to be competitive, but you also need to be profitable if you want to survive for the long term. So how do you go about setting prices that'll help you do both? Do you base them on your competitor's prices? Based on your costs? Based on the price a buyer is willing to pay?
The answer to all these questions should be yes. You need to understand not only your costs but the competitive markets as well in order to successful price your products or services--one part of the equation is not enough. So you have to be competitively price your products or services, but you also have to ensure you're making a profit.
So what are some of the things you should take into account when establishing your prices? These questions will help you figure it out:
1. What are the direct costs of your product or service? This is usually the easiest part of the equation to figure out as it refers to the direct materials and labor associated with your offerings.
2. What are your business's indirect expenses? These are often referred to as overhead and include expenses such as insurance, advertising, rent, office expenses and more. Although not directly contributing to the cost of your product, you need to know what they are so you can calculate a selling price that helps you cover these costs.
3. What is your breakeven point? Breakeven is where your costs and your income are equal--meaning, there's no profit. Once you've reached your breakeven point, anything you sell above and beyond that generates profits for you. You can't operate a business without knowing how many units you have to sell before you start being profitable. And if your breakeven point is 20 units a month but the market says it's realistic to only sell 10 units, then you'll need to reassess your business model!
4. How is your competition pricing their offerings? Compare the offerings and prices your competitors have set to see where your goods fit into the existing market. But don't just focus on price because small businesses often can't compete on price along and be viable in the long term. Look at your internal processes, and determine where you can add value without adding cost. Added value enables you to promote those aspects to your customers and price your products more profitably.
5. What is the current state of your industry and the overall economy? Life is constantly changing, and you must be aware of changes in your industry and the economy as a whole as you plan new products and services. What was hot last year won't usually be hot this year, and you need to understand the marketplace so can continue to make good business decisions.
As a business owner, your initial reaction may be to want to under-price your offerings so you can make large quantity sales. But that often isn't the most profitable choice. There's almost always going to be someone else out there willing to go out of business first by not monitoring their profitability and offering rock-bottom prices. But without a profit, how will you continue to operate your business? You won't! So it's important to assess what the market needs are and how you can fulfill those needs with profitable products and services.
Every pricing decision you make should offer a win-win outcome where your customers get a good value for their money and your business makes a reasonable profit. Profit is what provides ongoing capital for you to fund research and development, purchase assets and offer a return for owners and investors.