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How to determine pricing for your small business

By Samantha Garner | January 8, 2011

You’re ready to start selling your great new service or set of products. So, how much are you charging? If your answer to that question was a shrug, read on!

Figuring out your pricing

Finding a good price for your product or service can be tricky. You need to find a balance between a price that’s appealing to customers but will also make you money. It’s also easy to doubt or second-guess your decisions. You may want to charge a high price to make more money, or charge a low price to undercut your competition. It’s a fine balance, with several elements in it.

Consider these things when figuring out what to charge for your small business’ offerings:

  • The costs that go into the development of this product or service – both fixed and variable. If you don’t at least cover these costs, you’ll lose money.
  • The prices of similar products or services that already exist in the market Try to stay within that range. How does your product compare to others in the industry? Are your customers willing to pay more for a new feature, or do higher prices meet with complaint?
  • The values associated with your product or service that are behind the scenes – things like reputation, durability and customer service.

The three methods of determining price

  • Cost-Based Pricing. This method involves setting your price high enough to cover the costs you generate when producing your product. Mark-ups can range from 10% to 60%.
  • Value-Based Pricing: Wit this method, you figure out the value customers receive from your product or service. Is your product exceptionally well-made? Is there prestige attached to your name (like with designer clothing)? Do you have unusually good warranties or customer service? Are you an expert in your field? Value-based pricing tells you what your customers are willing to pay, rather than just covering your production costs.
  • Competition-Based Pricing: Here, your base price follows what your competition is charging. Where you fall in this line depends on your industry, image and what you’re offering. With luxury items, it’s not unusual for prices to reach on the high side to seem more extravagant. But with convenient and common products or services, prices are often on par with or even lower than the competition (think of all the sale flyers you receive and the kinds of companies that send them). Choose your prices carefully with this method – prices way off the mark can see your customers flock to your competition.

Good luck and happy selling!

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