The price is right — or is it?

When your focus is on the quality of your product or service, you might overlook the risks involved in setting prices. With prices set too low, you won't make enough money. If they're set too high, you could drive away the customers you need. The more information you have about your market, the better prepared you are to set prices that can lead to profit.

Which type of pricing best suits your needs?

  • Cost-based: price = cost + mark-up
  • Market-based: what the market is charging
  • Value-based: what your goods are worth to the customer

One way to determine the price for your product or service is to examine its unique features. These contribute to the value perceived by your customers and allow you to use a value-based pricing system. This can be more lucrative than the more traditional model of cost-plus pricing. As you calculate the value of your product or service, ask yourself the following questions:

  • What costs are directly related to producing or providing your product or service?
  • What other costs do you need to recover, such as overhead expenses?
  • What is your breakeven point? Anything above is profit.

To set value-based prices, study your customers' relationships with your products or services. How do they use them? Consider investing in some form of market research in order to communicate this value back through advertising, sales strategies and the way you manage customer interactions.

Be wary of low prices. Under-pricing may lead to the perception of your products or services as cheap or offering less value than those of your competitors. It may be more important for your business to be known for its quality than for its price points.

Once you set a price, don't expect to stick with it forever. Test new prices and promotions as you monitor your costs and revenues. Keep an eye on each product or service for profitability. And keep an eye on your competitors — when you raise or lower your prices, they may follow suit.

Check out our sections on Developing a marketing plan and Pricing for more ideas on how to approach this challenge.


Comments

Posted by J.C. on December 7, 2011
I find the information is nicely condensed and to the point for a newcomer. However the next step, on how to proceed in selling product would be most helpful
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