Setting the right price point for your company’s goods or services requires factoring in several key elements. Prices must be low enough to ensure your customers make purchases and to encourage consumers to patronize your business instead of your competitor’s business. However, your small business relies on the revenues you generate, so your pricing must leave you with a reasonable profit margin. The perfect pricing strategy depends on the type of business you run, but there are important factors that apply to any business.
Understand Your Costs
The first goal of product pricing is to ensure a profit. To guarantee some profit, you need to understand what amount is necessary to cover costs. This leads you to the necessary markup amount per product and helps you determine how many of each item you must sell to be comfortably profitable. Your total costs go beyond the actual cost of the product consider your overhead costs as well. This includes fixed costs (such as the rent you pay for storing goods) and variable costs (such as shipping fees). Calculate these costs into the total cost to determine what you really pay for each product. Begin by listing the amounts you pay for rent, employee wages, raw materials, and any other direct production costs. This gives you a basic price per item necessary to cover costs with nothing left over. Then, factor in what you want or need to make in terms of profit. Markup percentages may vary from item to item.
Understand Your Patrons
This element requires some market research to help in understanding your customers. You need to determine some basics about your core group of customers, as well as how to use price points to target new patrons. Your small business depends heavily on happy repeat customers, understanding what they can afford, and the types of products they are likely to spend more on. Consider sending informal surveys or questionnaires to regular customers, either through email or when they visit your store. Divide your customers into a few basic segments your largest group should be your ideal target audience. If most of your shoppers are incredibly price-sensitive, keep this in mind when establishing price points.
Understand Your Competition
Research your main competitors as well. Understanding the price points they set on the same or similar items is essential to retaining customers.
- Determine how similar a competitor’s product is to yours. Decide if the price seems reasonable, given what your competitor is offering.
- Consider your own product. Determine if your good has added value, which would support a higher price point.
You still need to cover your costs, and lowering your own costs can make your business more competitive. Of course, if you determine that your company can financially withstand the same or a lower price point, customers are always happier to pay less and shop more frequently at your business than they are to pay more at your competitor.