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.
Sell your business itself, not just your product or service
Your pricing represents cost and value, so weave company culture and values into the overall impression of your products or services. 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.
Understand where Marketing and Finance Systems intersect
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 for 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 what makes your company unique and gratifying.
Align with your ideal customers
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 need to first 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.
Differentiate pricing for products versus for services
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 choose a revenue goal 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 your people need a certain level of certification or education. 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.
Monitor and adjust your prices as needed
Your market is constantly in flux, so your prices should be too. As you learn more about what your customers truly want and consistently monitor your cash flow plan, you'll improve your ability to adapt pricing to market changes—you’ll know more innately 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 jeopardize customer 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.
Listen in and look around
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 every opportunity 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 feel 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, regularly check industry market data and news reports on the economy. This will give you 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. Having the big picture will really help your prepare if you have to pivot in order to brace for a loss or bulk up on supplies for a new demand.
Plug in the numbers
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. 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 indirect costs that make your business what it is.
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:
- Sales records to determine the price per unit.
- The number of units sold.
- The variable cost per unit.
- Total fixed expenses.
Ask yourself questions
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 if your fixed overhead expenses may increase—how can you moderately increase your price per unit without losing customer loyalty and trust? Always ask yourself large-context questions so you can picture 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 to determine 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.