How to price your product or services for good deals?
Strategies to price your products
Pricing is one of the biggest mysteries of all business aspects. You can almost visualize a secret committee huddled around a dart board. Where the dart lands, that is the price.
If your product or service is identical to your competitor, this usually poses no problems in the pricing department. Just charge what the market already supports.
Pricing DOES pose a problem, especially for the entrepreneur with a new product or deciding to change the price of an existing one.
Deciding on a price is a complex process. Do you charge the highest price the market will bear? Going for low volume with bigger profit margin per product. This is known as skimming. Today’s fast changing technology can make a product obsolete in a short time. Skimming may be the way to go for your particular product.
Another option is Price Penetration. You set a low price to gain customers quickly – Going after high volume with lower profit margin per product.
Dr. Ken Evoy did this with his book, Make Your Site Sell. It worked very well. He delivered a great product backed up with exceptional service. He gained lifetime customers quickly. His company became well known and respected as an expert in the field of internet marketing and selling. He added to his product line with an already established customer base. All with a $17.00 book.
That book was under priced for the information it contained. It is an excellent example of successful price penetration. It is also the most used book in my collection.
Is price penetration the answer for your product or service?
Don’t undercut so you are losing money unless you can afford it. The goal is to maximize profits not loose them.
Is there a formula for Pricing?
The Simplest one is: Price = Cost + Fair Profit.
This formula cannot guarantee a profit. Cost and profit
estimates hinge on volume estimates. Volume estimates hinge on the RIGHT PRICE.
How do you determine the right price? Research!
- Start asking questions like:
How unique is your product or service?
What market conditions will influence my price?
Are there legal restrictions that can influence my price? - Hire a firm to do the research and analysis. This is usually out of most entrepreneurs budget.
- Do your own research and analysis.
One of the biggest mistakes made, especially by start-ups is to enter the market as the “lowest price.” Unless you have the financial backing and the resources of a Wal-Mart, avoid it. This strategy can back fire for several reasons:
- Perceived as poor quality
- You have to sell in high volume or work many hours to make up for the low profit margins.
- Another “lowest price” competitor enters the field and puts you out of business. Lack of true self-worth, confidence and courage in pricing are often the culprits for under pricing your product.
There are three components in the pricing process:
Pricing Objective, Daily Income Benchmark and Pricing Methods.
Pricing Objective – What do you hope to achieve?
There are 3 ways to find the appropriate level for you and your product.
- Base Price — The lowest price or rate you must charge to cover your cost including, cost of living and keeping your knowledge and skills up to date.
- Realistic Price — Substantially higher than Base Price. Top of the quality range in your field but still competitive while offering good value and service to your customers.
- Premium Price — You position your product for the “elite group” and go after the client who wants and can afford the best.
Daily Income Benchmark — How Much Per Day You Need To Make.
How do you determine daily amount? You need two figures… Base Price and Chargeable Time.
Base Price is one of your pricing objectives. It’s a very important one. This is the one figure you need know so you can keep your doors open. This is your break even point. The absolute minimum needed.
Chargeable Time is the maximum number of working days/hours in a given year. This is the one figure most business owners never consider. It is the number one reason why you end up working long hours and long weeks for your business.
Now divide your cost or Base Price by the number of days from your chargeable time figure. This gives you your daily income benchmark. The amount you need to be making per day from your products or service rates.
Pricing Methods – Used to set your pricing
There are 10 different methods you can use to determine how your product will meet your three pricing objectives. Use a combination of them for your best price.
How to Put It Together Pricing Example Using One of the Methods:
You offer a service and need to figure your hourly rate to charge your customers. You will use method #4 Going Backwards.
Using the break even and chargeable time worksheets, guides and questions, you determined your Base Price is $30,000 and your chargeable time is 160 days.
Base Price $30,000/160 = $187.50 per day
You need to be making $187.50 per working day to meet you minimum expenses.
You have 160 working days. Referring back to your chargeable time worksheets, you can realistically devote an average of 8 hours to business on your working days. Not all 8 hours will be billable, you have administrative task, bookkeeping etc. to do.
4 hours out of the eight are actual billable activities.
4 hours x 160 days = 640 billable hours 30,000/640 = $46.88. You have to bill at least $46.88 an hour. Yes you can round it up to $50 an hour.
Don’t guess or do your pricing on a whim. Take time and go through the process and you’ll be on the right track to a more successful and profitable business.
