It's said everyone has their price. But for entrepreneurs, it's not always easy to know what that price should be. Too high and you won't attract customers. Too low and you can't cover your expenses.
Many entrepreneurs undervalue their products or services. Elizabeth Allen, 31, founder and executive director of Awesome Advertising in Kansas City, Missouri, was shocked to learn that farming herself out as an independent copywriter at a rate of $50 per hour was well below the agency norm of $125. Part of the problem was she didn't know enough about her market; the other was that she didn't have the nerve to charge her clients more. Allen has since learned her lesson, one of many she shares in advising other entrepreneurs at the Kauffman Center for Entrepreneurial Leadership, also in Kansas City.
Never underestimate the public's willingness to pay more for a product or service that stands out from the crowd. Doug Wood, 35, and Matt Wolfert, 32, opened their first Treehouse Cuts Salons for kids charging $9.95 for a haircut--about $3 more than the competition. Today a Treehouse haircut costs $11.95. The difference is in the salon's presentation. Each location features a 12-foot artificial tree, styling chairs that look like Barbie jeeps, and Sony Playstations. "Parents are willing to pay a lot of money to get their kids to sit here and not cry," says Wolfert, whose company is in Granger, Indiana.
At one extreme, some entrepreneurs charge as little as possible to gain market share. Others take a risk by pricing high to recoup their investment quickly. A high price tag can sometimes make a product more desirable. When J. David Allen, now director of the John F. Baugh Center for Entrepreneurship at Baylor University in Houston, owned a company that sold dominos for $3 a box--barely above wholesale--sales were disappointing. After he printed them with a design to celebrate the Texas sesquicentennial, buyers snatched them up for $19.95. "The perceived value increased because of our price," Allen says.
But most start-up businesses conservatively hover in the middle range when setting prices, particularly when they're in price-sensitive industries. Before deciding on a price, Lynne Joy Rogers, director of the Urban League's Ron Brown Business Center for minority entrepreneurs in Inglewood, California, advises you know down to the dime what you pay for goods, operations, staff, distribution, marketing and promotion. Then see what the competition charges. "Identify people doing the same thing," Rogers says. "Visit their stores. See how they merchandise their products."
Don't just look, though, says Marie Nahikian, executive director of the Queens County Economic Development Corp., which runs the Entrepreneurial Development Center in New York City. "Buy your competition's product," she says, "and assess not only the cost, but also the quality and service."
Knowing your competitors' prices is invaluable. If they've been in business for a while, it's likely those prices have been the object of much reflection. By thoroughly researching your competition and how they price compared to your best determination of their costs, you can take advantage of their hard-won lessons.
Acting as a secret shopper will reveal plenty about your competition, but try this tactic only when anonymity is assured. Another method is talking to the people most likely to buy your product. Ask what they'd pay for your service or product, and when they would consider paying extra. If customers are willing to spend more for faster turnaround, for example, your price should reflect that. "Your customers have priorities in mind that translate to a certain price structure," Allen says. "Talking to them gives you a better feel for what they value."
It's a lot of work, but it's better to do the work in the beginning rather than change prices on your customers later. Then you'll really learn the meaning of "price resistance."
Julie Monahan writes about business from her home office in Seattle.