What's the Magic Price?

How to set a price for your product or service that'll leave both you and your customers happy
Magazine Contributor
3 min read

This story appears in the August 2003 issue of Teen Startups. Subscribe »

(YoungBiz) - Sarah Zelechoski, 21, got a rude introduction to business when she and her brother Luke first opened Saruke, a Web design company in San Diego, and went on one of their first sales calls. After giving a price quote to a local real estate firm over the phone, Sarah and Luke arranged a meeting to finalize the deal.

When the Zelechoskis got there, however, the agent told them another company had offered to do the job for much less, so they lowered their price drastically. The job ended up being much more involved than they originally thought, and Saruke made almost nothing on the deal.

The Zelechoski brother-sister team is part of an growing trend of tech-savvy teens who are offering Web design services today at prices far below industry standards. They do, however, still have to find the "magic price" for their services--one low enough to attract customers, yet high enough to make an adequate profit.

Floor and Ceiling
Matt Chaifetz, 18, owner of Innovative Travel Concepts (ITC) in Manhasset, New York, devised a good way to handle the tricky problem of price when he learned two words: "floor" and "ceiling." The lowest price you can charge and still break even is the floor. It includes the cost to produce a product as well as your time and labor. The highest price a customer will pay is the ceiling, and that figure changes according to the strength of the demand for the product. In the space between the floor and the ceiling, there are lots of prices, and you have to decide which one is best for your customers.

Chaifetz made a surprising discovery about pricing three years after opening ITC, a service business that allows individual travel agents to sell bookings without high fees. After hiring an independent consulting firm to conduct a survey of his clients to determine his best pricing strategy, Chaifetz found out that he could actually charge more for his services because of his track record for good customer service.

"I think my best quality as far as business goes is my ability to see things happening ahead of time," Chaifetz says, and this is especially true with pricing. He identifies his target customers and tailors his services and pricing to fit their needs. Chaifetz also studies the competition and notes their pricing strategies, both the ones that work and the ones that don't.

And while the Zelechoskis may have walked away from one of their first deals empty-handed, they did learn some valuable lessons about the importance of pricing, such as being sure to get all the facts about a job before you give a quote. Since then, Saruke has instituted additional pricing policies such as using a pre-determined price list and never giving price quotes over the phone.

So if you've been trying to discover the magic formula for pricing, it's easy to see you're not the only 'trep who struggles with this issue. Try some of the solutions suggested here, and, if all else fails, take a survey and ask your customers--most of the time they'll tell you exactly how wide they're willing to open their wallets.

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