There is no set formula for price-making, because every single business is unique. If setting prices were simple, there wouldn't be a Professional Pricing Society in Marietta, Georgia, a support group full of people whose job it is to determine prices. But at its most basic level, you could think of it in the way that Gaithersburg, Maryland, business strategy consultant Marsha Lindquist does.
"I can get fancy," says Lindquist breezily. "But the basic questions you need to answer are, What is the market going to pay, and what are your costs?"
Those two concepts get a little tricky when you're a service business and not selling a product, so let's stay with products for a moment: Meet Anthony Shurman, 34, president of Yosha Enterprises Inc. in Westfield, New Jersey. His company provides a valuable service to the world-conquering bad breath. His product is Momints, breath mints that were introduced in 2002 at $1.99 for a 36-mint package. Later, Shurman dropped the price to $1.79, and in 2003, he took the product nationwide, charging $1.69 per package. Each time he dropped the price, he had a good reason for doing so-to stay competitive with competing brands.
When Momints debuted, Shurman says it was the only liquid breath mint on the market, so its uniqueness allowed him to charge higher prices. As Shurman explains, "I think when you're launching a new product or starting a new business, there are plenty of examples of businesses going after a target audience and creating a cachet for themselves by pricing a little higher and adopting an elite strategy, where you present yourself as this high-end competitor in the market." Shurman also felt he could price the product a little higher because each package had 36 mints, more mints than any other brand.
Looking back, Shurman believes his first strategy for pricing really wasn't the best one. "If I were to do it again, I probably would have started with a lower price. Our consumers don't really give us credit for having those extra mints, and I think a more visible difference to the average consumer would be a lower price," says Shurman. That's why he recently used a regional grocery chain as a test market, where he sold a 28-mint package for 99 cents-70 cents less than his 36-mint package. Says Shurman, "Our sales went up 350 percent." Yosha now brings in more than $3 million annually, and Shurman has reason to believe he'll sell even more mints at the lower price.
Shurman's story can't help but reinforce the idea that coming up with the right price is vital. "If you're off [from what the consumer wants to pay] by a few pennies here and there, it probably doesn't matter much," concedes Shurman. "But I do think it's a critical part of the overall package. If you're going to price a product at $5, when it should have been $1.99, that could spell doom."
However, while understanding what the customer is willing to pay is important, so is understanding your own psychology when it comes to money. After all, the price you select for a product or service is going to reflect on both you and your business. Is your company one that attracts those who identify with Desperate Housewives, or the desperate housewives clipping coupons and wondering if their husbands are going to be laid off? There's no right answer. Both markets need to be served. But if you figure out who you are and what you want your company to be, you'll better understand who your customer is.
Geoff Williams has written for numerous publications, including Entrepreneur, Consumer Reports, LIFE and Entertainment Weekly. He also is the author of Living Well with Bad Credit.