Proper product or service pricing can make or break a business. Set a price that's too low and you will have no profits (or worse). A price that's too high will lose you business and may even give you a bad reputation for price gouging that's hard to repair. When I ask business owners who are struggling how they figured out what to charge, few did any in-depth analysis or research. Just a few extra steps can make a big difference in building a strong business.
- Determine your costs. Detail your expenses including direct and indirect/overhead costs like salaries (including your own), taxes, materials, rent, insurance, marketing, etc. Keep track of costs that vary by product or service.
- Calculate your hourly rate. If you sell a product, your hourly rate may be factored into the cost of goods sold. For a service business, it will be all or part of the fees you may charge. To calculate the rate, first decide how many hours a week and how many weeks per year (factor in holidays, vacation, and sick/personal time) you want to work. Deduct 20% nonbillable time to handle administrative and business development tasks. Then divide your expenses by your billable hours to get to your hourly rate. Finally add in a reasonable profit margin based on your industry.
- Research your competitors, industry and market. Product, service and market differences may lead you to a different price point than your competitors, but your research of comparable businesses will help you establish a baseline for your pricing. You should also determine what is the typical profit margin in your industry.
- Quantify your value add. For service businesses, consider what your unique expertise and services are worth. This can justify a higher profit margin, provided your market perceives the value of what you offer. You may need to do additional market research to determine how much your audience cares about your differentiators.
- Test and revise. Pricing is a continuous process. Test and regularly monitor your results. Also review profitability by product or service. Finally, remember to periodically raise prices.
The good thing is it is not a “one and done” decision. Whether you are considering starting a new business or you have been in a business a while, it may be time to take another look at your pricing.