When it comes to pricing products or services, most small business owners don’t know where to start. Perhaps you’ve had the experience of basing your prices off competitive offerings in your market or by adding “x” percent to cost of production—and then not looking back to evaluate or consider the systemic or holistic impact of your pricing structure. In our experience, one of the hardest tasks small business owners face is how to price the goods and services they sell. It’s much more than just plugging in numbers—it’s observational, intuitive and even a little interesting! But with strong business systems and documentation to back you up, it’s far more achievable than you think to find that sweet spot in your market.
If you’ve never built an intentional strategy around your pricing structure, now’s a great time to take a look at how you approach it. And nice as it would be, there’s no magic formula or one-size-fits-all price point system to get your business’s pricing plan to where you want it. Since pricing isn’t just about the numbers, you’ll need to step back to gain some insight before you jump into pricing formulas. Here are some important things to consider.
Your pricing represents cost and value, so the ideas around your products or services also incorporate your company culture and values. Any EMyth Coach will tell you that a commodity-based business accepts the going rate, while a value-based business sets the right price.
In your business, you’re not selling your product; you’re selling the business itself. Of course what you’re offering your customers is an essential aspect to making a profit for your company; but if you want to grow a business that works, it’s necessary to realize that your business itself is your true product.
Pricing is vital for maximizing company profits, and it isn’t just about the product or service that your customer purchases—it’s also about the intrinsic value that it offers them. That’s how Marketing and Finance come together: Your marketing message communicates the value of what customers can purchase, while your financial systems balance revenues and expenses so you can make a profit.
Customers come to you not just because of good pricing, but also because your consistent business systems deliver the high-quality product or service they’re looking for at the right price, in the right way, every time. Remember, purchasing is largely an emotional choice with many factors at play. Rather than focusing on goods and/or services as commodities, illustrate the ethos of what makes your company unique and gratifying.
So, how do you know who you should be pricing your product or service for? It’s not about trying to appeal to every customer imaginable—it’s about attracting the right customer whose values and needs align with what you’re offering. But before you can attract your ideal customers and attend to their interests, you have first to identify them —the demographics of who they are, and the psychographics of how they think and behave. By learning as much as you can about your customers, you’ll forge a strong bond between your Marketing and Sales strategies; and you can set your prices based on your familiarity with their preferences, limitations and purchasing habits. This connection can boost brand loyalty and, in turn, sales.
What’s the difference between pricing for products versus services? In some ways, not much. For example, with either type of offering, you have to account for the overall costs it takes for your business to run—consider rent, payroll, utilities, supplies, benefits, insurance, taxes, etc.—and determine how much revenue you want to generate in relation to your business’s expenses, credits and other miscellaneous outgoing cash flow.
But there are differences. With a product, pricing is a little more straightforward—at the most basic level, what your customers pay should cover the cost of goods (COGS). And then of course, you have to add extra to make a profit. With services, there are more intangible factors at play: You have to pinpoint the amount of experience required to provide the service, the labor and time required, and if a certain level of certification or education is required of your people. Here, it helps to research competitors’ pricing and see how their consumers respond. Then choose your own pricing model for your services—determine if you’ll charge hourly or flat rate, or offer variable price points on a case-by-case basis.
Your market is constantly in flux, so your prices should be too. As you become more aware of what your customers truly want and consistent in monitoring your cash flow plan, your ability to adapt pricing to changes in the market will also improve—you’ll recognize when you can raise your rate or find overhead costs to cut safely so you can maximize revenue.
But avoid changing your prices too frequently—this can diminish your customers’ trust in you and your brand, and their perceived value of your product or service. If you do need to make pricing changes, avoid the two main risks: Overpricing and underpricing. Set the price too high and you face customer pushback; set it too low and and you’ll cut into your profit margin and curb your cash flow, hurting your business in the long run.
While connecting with those who make up your market, consider both the tangible and intangible factors that should be recorded. Put your previous experience running your business to work—jot down past insights on how your pricing strategy has varied. Then, going forward, implement a disciplined recording strategy for all the information you’re taking in. Analyzing these facets of daily operations and the market your business is in can yield significant results—by comparing yourself to competitors, looking at your cash flow plan from previous months, you can compare where things stand now to how they were, and use that information to project future trends.
You’re not likely able to spend thousands of dollars on intense market research while pricing your items. But chances are you don’t need to— you may already be extremely close to the day-to-day operations of your niche markets. Use any opportunity you have with your employees, vendors, competitors, and customers to learn more about the market you’re in. Engage your team to conduct a customer survey in person or online—this will make customers seen, heard and appreciated. Visit competitors’ locations and take notes: What items or services do they have on sale? Where are they offering discounts? How are they implementing the visual and customer service elements of their Brand Promise?
And especially in an unstable market, check in with market data on your industry and news reports on the economy to get an idea of general market shifts, such as changes in hiring trends, or a gap in the supply chain of an important material that will affect your production down the line. Take in the big picture from larger markets and think of how you’ll need to pivot in order to brace for a loss or bulk up on supplies for a new demand.
A pricing grid is a great tool for experimenting with different numbers and supporting decisions, but it won’t tell you what price is right at all times—this means that strategic thinking is key.
Look at your profits with your existing pricing structure. Remember, pricing isn't just about the Cost of Goods Sold (COGS), which includes all the costs directly related to producing a product or providing a service (such as materials, labor and shipping). It’s also about the work that goes into the indirect costs that make your business what it is as well.
So, what are the financial consequences with your current pricing? Are your higher-priced items seeing more turnaround than lower-priced items? Are customers opting for piecemeal service items rather than a complete package? For each of your products and/or services, look at:
Once you have a pricing grid, try some “what-if” scenarios that can help you test the waters. Plug in a new number to see what would happen if you raised your prices by “x” per unit. How would that affect the number of units sold? Or, look at a market forecast and predict whether your fixed overhead expenses are expected to increase—how can you moderately increase your price per unit without diminishing your customers’ trust? It’s key to always be asking yourself large-context questions so you can consider what a loss would look like, or how increasing your marketing and sales expenses will change your bottom line.
Pricing is in part a speculative exercise in determining likely outcomes—so don’t approach it like you need to have the perfect price model the first time. As you go through these steps, be sure to document everything. That way, you’ll have a complete and well-organized overview to evaluate the value of what you sell—your products, your services, your business—and set your prices with confidence. And if you’d like support to chart out your pricing, we’re here to help.