How much should I charge for my product or service? Good question, right? In theory you know you want to make a profit so that means you need to charge more than it cost you to make and deliver your product or service. But in practice it isn’t as easy as it sounds to determine the right pricing structure for your business.
Furthermore, one of the big mistakes I find new business owners make is not charging enough. Sometimes it is because they don’t understand their cost structure and sometimes it is because they are afraid to charge more because they are desperate to get the business. Either reason creates a very bad business situation.
Pricing a product is a little easier than pricing a service because you have hard costs associated with the production of the product. So basically the equation is: cost + markup = retail price. But your actual cost is more than your out-of-pocket expenditures. Your cost includes both fixed and variable items. The hard costs are the items you pay for that go into making the product. But there are also variables costs which include, marketing, business overhead, salaries, travel, sales commissions, shipping, etc. To determine an accurate cost, you must allocate a percentage of variable costs to each item you produce.
As for the appropriate markup, it is based on what is generally accepted in your industry. A lot of retailers use a customary markup of 100 percent. If you have no idea what is standard for your business, check the Annual Statement Studies published by the Risk Management Association (RMA) to get averages. The information is also available online via the RMA web site.
Service providers have more difficulty deciding what to charge, particularly when you are the one providing the service. To determine your price, check out what the competition is charging. As a rule of thumb, you don’t want to be the most expensive, but you don’t want to be the cheapest either. (I’ll explain about why being the cheapest isn’t good later.) When you understand, what others in your industry are you charging then you can price your services according to a fair market value.
As a new small business owner, it’s often difficult to quote a price for a product or service because you are so worried about getting the business. You don’t want your potential customer to go somewhere else because your price was too high. There is an understandable temptation to lower your price because you are hungry for the business and something is better than nothing. Or is it? I don’t think so.
You shouldn’t undervalue your product or service. If you believe in your business offering then you should realize customer’s are willing to pay for what they perceive to be of value to them. Your challenge is to communicate your value. When you lower your price to basement bargain prices, not only do you look desperate, but you also look as though your product isn’t valuable. If you don’t value your business offering, then why should anyone else.
Competing in the market on price alone is a huge mistake. There is always someone out there who is willing to provide the product or service for less than you. That’s particularly true if you are competing with major chains or retail discounters. You are almost never going to win at that game. They have more resources and can sustain a loss until they have put you out of business.