Step 10: Set Your Price
This story appears in the March 1997 issue of Startups. Subscribe »
Find the right figure to make the highest profits.
When launching your own business, the decision of how much money to charge for your product or service requires careful consideration. If you charge too much, you risk failure by pricing yourself out of the market. If you charge too little, potential customers may question the quality of your offerings.
A common mistake made by new business owners is underpricing their offerings. This results in the inability to cover all necessary expenses and still turn a profit. When trying to decide on a price, it's important to consider all of the costs related to providing your product or service--supplies, overhead, production, transportation, promotion--before settling on a figure. It's also important to find out what similar providers in your market are charging and to adjust your figure accordingly.
Successful entrepreneurs price their offerings safely between their price ceiling (the top price a customer will pay for a product or service, as determined by market research) and their price floor (the price below which they cannot offer their product or service and still generate the necessary profit). Unique or special features enable you to charge more for time and talent; substantial competition requires charging less in order to break into the market.
The pricing strategy followed varies dramatically from one business to the next. Our Starting Smart entrepreneurs are back to share their own unique approaches to pricing.
A business writer for the past eight years, Kylo-Partick Hart has run a successful homebased consulting business since 1989.
Meg-A-Nut Inc.
Vic and Suzette Brounsuzian
"We've got some items we mark up 75 percent, some we mark up 130 percent and we've even got some stuff we mark up over 200 percent," says Vic Brounsuzian, 44, who, with his wife, Suzette, operates a small shop selling dry-roasted nuts, seeds, fine chocolates and other products. The Brounsuzians' pricing strategy seems to be working well: Since opening day, the couple's walnuts, pecans, pistachios and filberts have become the hit of their Streamwood, Illinois, shopping plaza.
To determine appropriate selling prices for the items in their store, Vic started out by gathering extensive pricing information from suppliers nationwide for the products and supplies they would need. Once he had a solid sense of the costs they would incur, Vic and Suzette took to the streets of their community.
"We did a good deal of walk-through research, going to other candy and nut stores in our area to find out the prices they were charging for the items we would carry," Vic explains. "After gathering extensive information, we would consider the overhead associated with the types of stores we visited to determine the approximate markup being charged per item. We knew that it would cost more to rent a shop in an enclosed mall than one in an outdoor shopping plaza, so we figured that information into our calculations."
After that, the Brounsuzians established prices for all of the items in their store and eagerly awaited customer response. "The first year is all about learning your business and compiling a list of mistakes you've made along the way. A big part of that involves setting some prices and seeing how customers react," Vic says. "If an expensive product isn't selling, perhaps it's time to lower the price a bit, as long as you're still making enough money to cover your expenses while leaving some room for profit. If an inexpensive item isn't selling, perhaps a price increase would convey a more solid sense of perceived quality and value."
Lets Go Party
Marian Fletcher
By the time Marian Fletcher, 55, decided to launch her own Baltimore-based party-planning and catering service, she already had more than a decade's worth of related experience working in her community. Despite her familiarity with pricing for such services, Fletcher nevertheless did a good deal of additional research before finalizing her fee list.
"I had been doing some party planning for a local restaurant owner for nearly 10 years and I loved it, but his restaurant ultimately closed," Fletcher explains. "Having worked there, I already knew the people in the community and had a sense of how much they'd be willing to pay. Still, I wanted to make sure that I didn't overprice my offerings once in business on my own, and I didn't want to underprice them, either, which might make potential customers question my top-quality reputation."
To learn what similar providers in the same city were charging for their offerings, Fletcher obtained some contracts from customers who'd hired other party-planning and catering services. She also directly contacted numerous restaurants and catering companies to find answers to her pricing questions. Since many of the people she approached seemed reluctant to help out a new entrant, Fletcher decided to go "undercover."
"Since very few people wanted to share pricing information with me when they viewed me as the new competitor on the block, I pretended to be a customer to obtain the information I wanted," Fletcher says. "I acted like I wanted them to do a job for me and was able to obtain a wide range of information. They provided me with fee lists, menus, and a variety of promotional literature. I now have a whole box full of items that I consult whenever I need to set a price for a new party package or catering option."
Proudfoot Wearable Art
Judy Proudfoot
"I have almost doubled the prices I charge for my clothing items compared to when I first started out two years ago," says Judy Proudfoot, 45, who designs and sells handpainted sweatshirts, T-shirts and other works of wearable art in and around her town of Alexandria, Minnesota.
"To decide what to charge for my creations when I was starting out," Proudfoot explains, "I first figured out how much I would pay for each type of clothing item when purchasing it from a wholesale clothing catalog. Then, I simply added $15 for my design and painting time, and another $3 to cover the costs of having each item delivered to my home. That's how I ultimately came up with my selling prices. What I soon found out, however, was that I significantly underpriced my offerings by following this approach."
At the crafts show where she first marketed her wares, Proudfoot learned that her prices were significantly lower than those of competitors offering similar products. "Some ladies came up to me, looked at some of my prices and said, `My goodness, how can you even make these items for the low price you're charging?' I instantly became concerned. I did some shopping later that day at other displays selling handcrafted clothing items and was literally embarrassed. For example, dresses comparable to those I was selling for $59 were selling elsewhere for $90 to $95. I learned my lesson, and I immediately increased my prices to fit in a more reasonable range."
After her experience at that first crafts show, Proudfoot decided that she needed to do a bit more legwork and visited several specialized clothing stores in her area to compare prices. Today, she sells her handpainted T-shirts for $28, sweatshirts for $35, and denim dresses and coats for about $100 each. "The funny thing about this whole experience," Proudfoot says, "is that my clothing items have actually sold better since I've significantly raised my prices. I guess it's really true that people assume higher prices translate into higher quality."
Next month: Our entrepreneurs will be back to share their experiences with the eleventh step to start-up: promoting your offerings.
Seven Pricing Pointers
1. Don't shy away from charging a fair price for your offerings--you deserve to be rewarded for your time, talent, risk and investment.
2. Keep your price within the range of what customers are willing to pay.
3. Remember that prices for the same products and services vary dramatically by geographic location.
4. The price you can expect to receive is determined in part by your distinct background, talents and skills.
5. Check out the rates of local competitors before settling on a price.
6. When estimating your expenses, consider costs associated with bookkeeping, travel, research, telephone calls, mailing and delivery.
7. Don't set a price so low that it endangers your financial well-being or your sense of self-worth.
Contact Sources
Let's Go Party LLC, 4531 Manorview Rd., Baltimore, MD 21229, (410) 624-0584.
Meg-A-Nut Inc., 1574 Buttitta Dr., Streamwood, IL 60107, (630) 837-2551.
Proudfoot Wearable Art, 1402 Bridegeport Ln., Alexandria, MN 56308, (320) 763-4904.
