Advice for setting your prices
Published in the July 5, 2015 in
Published in the July 5, 2015 in
Q: My prices don't seem to be competitive. What should I do?
A: Setting prices for products and services should be simple - cover costs, make a profit and appeal to customers. But there are more variables to the pricing formula than many small-business owners may realize.
"When you're starting out, you may not have a good handle on all the costs you'll incur," observes Janet Attard, founder and owner of BusinessKnowhow.com. "Unless you have previous experience estimating jobs in the same industry, you may have difficulty making accurate estimates of the time and/or materials needed to complete jobs. You also may not account for non-billable hours - the time you spend marketing and Other costs of doing business may also be overlooked, until you have to pay them. These include payroll and self-employment taxes, fees for accepting credit cards, health insurance and other benefits, and a variety of overhead expenses.
Yet even after all those costs are accounted for, a seemingly fair price may not gain traction with customers.
A: Setting prices for products and services should be simple - cover costs, make a profit and appeal to customers. But there are more variables to the pricing formula than many small-business owners may realize.
"When you're starting out, you may not have a good handle on all the costs you'll incur," observes Janet Attard, founder and owner of BusinessKnowhow.com. "Unless you have previous experience estimating jobs in the same industry, you may have difficulty making accurate estimates of the time and/or materials needed to complete jobs. You also may not account for non-billable hours - the time you spend marketing and Other costs of doing business may also be overlooked, until you have to pay them. These include payroll and self-employment taxes, fees for accepting credit cards, health insurance and other benefits, and a variety of overhead expenses.
Yet even after all those costs are accounted for, a seemingly fair price may not gain traction with customers.
"Prices are market-driven, not cost-driven," former executive and veteran SCORE Houston mentor Raj Mashruwala explains. "It doesn't matter what your costs are because the market doesn't care. What matters is if you can make a profit at a price the market will bear."
Mashruwala also recommends researching online industry benchmarks for gross profit margins. He also cautions new entrepreneurs to avoid the frequent mistake of underpricing their products and services in order to lure customers.
"Rather than getting a toehold in your business, you're actually giving competitors an advantage, because there's no way you can survive for the long term and meet your clients' expectations by pricing under the market," he says.
Attard also says, "Discounting can lower the perceived value of the product or service, or make the customer think you lack the experience or resources to do the job. If you underestimate costs, or overestimate sales volume, the outcome will be reduced profits or a loss."
Once you do establish a reasonable pricing structure, make it a point to review it several times a year. Customers and competitors are watching pricing trends, so don't risk being left behind.
A good place to go for more information on product and service pricing is www.score.org, click on the Marketing tab and then Price Strategy, where you will find online webinars presented by SCORE volunteers with expertise in this area..
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