Small Business Advice
How to price your product or service
QUESTION: I am in a quandary about how to price my products. Can you please provide pricing options for products and services?
ANSWER: There are a number of pricing options, depending on the type of product or service being offered. We will discuss several in this article.
• Cost-plus pricing – This is the simplest method. Just compute the cost to produce and deliver the product or service and then add, for example, 10% for your profit. This method may not always reflect the indirect expenses of rents, utilities, insurance, etc.
• Competitive pricing – This method only considers what the competition is charging and what the consumer is willing to pay. It may not take into consideration your cost of production and delivery or your indirect expenses.
• Rate or Project based pricing – If you are providing a service you can charge by the hour or offer a flat rate for the project. Attorneys offer these options and the client must decide if a flat rate is preferable to an open ended hourly rate.
• Tiered pricing – This is where you give the consumer the option of choosing between different versions of the same product or service. As an example, think about buying a car, motorcycle, or a bicycle. You can choose a basic model or one with all the bells and whistles.
• Decoy pricing – Also known as a loss leader; you price a high demand item at a discount to encourage the purchase of other products to be used in conjunction with the loss leader.
Regardless of which strategy you choose, the price you charge should recover both your direct and indirect costs of operation, plus a margin of profit. Your direct costs are those directly assigned to the products or services you provide. They include labor, marketing, and manufacturing costs.
Indirect or hidden costs are the day to day expenses associated with running the business. They include such items as rent and utilities, loan repayments, cleaning, office supplies, and your own salary, to name a few.
Your add-on margin of profit is dependent on the perceived value you are delivering to the customer. If your competition is competing on price alone, you must explain why your price is higher and the added value you bring to the table.
Study your competition. Assess their strengths and weaknesses. Study your customers and determine how best you can solve their problems. Never promise anything you cannot deliver and go the extra mile with personal service.
In summary, I offer a quote from John Ruskin, a leading English art critic of the Victorian era …
"There is hardly anything in the world that someone cannot make a little worse and sell a little cheaper, and the people who consider price alone are that person's lawful prey."
Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call (239) 430-0081 or visit https://naples.score.org/mentors.The SCORE business office is located at 900 Goodlette Road North, in the Fifth Third branch bank building. Office hours are 9 a.m. to noon, Monday through Friday.