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How to Price Your Products or Services

Products or Services

When running your own business, one of the most important decisions you’ll ever make is how to price your products or services. As one of its key cornerstones, the amount you charge will impact every aspect of your company.

It will also affect your customers’ habits. Nearly every economic aficionado can tell you that customers are willing to spend more on quality products and services when times are good. During lean years, however, they want to maximize every dollar, which could result in choosing not to buy your goods.

Whether you’re an experienced professional reevaluating your pricing schema or a brand-new entrepreneur planning the launch of your business, read on to discover everything you need to know about determining the value of your offerings.

Calculating Prices

Pricing can involve walking a careful tightrope between the needs of your business, such as generating enough profit to cover the rent, payroll and other essential costs, versus your clients’ perceptions. When something is valued too low, it can be seen as “cheap” or lacking quality. If you price too high, you can alienate customers and their wallets.

The first step in making that determination is figuring out your costs.

Fixed and Variable Costs

As the names imply, fixed costs are those recurring business expenses that aren’t directly tied to production or how much you sell. Also known as overhead costs, this can include line items like rent, utilities, insurance, payroll, property taxes and more.

Variable costs, then, go hand-in-hand with producing your goods or services. These typically include labor, packaging, promotional materials, shipping and other factors — like point-of-sale credit card fees — depending on your business model and what you sell.

Picking a Profit Margin

Now that you understand these foundational costs, you can determine what profit margin you want. According to the U.S. Chamber of Commerce, a profit margin is simply the percent of a sale that is profit. If you sell a product that costs $20 between variable and fixed costs, you’d need to charge at least $25 to make a 25% profit on each item sold.

However, before you start seeing dollar signs, remember that prospective clients ultimately determine your sales. If you’re overeager to retire by the time you’re 55 and choose a hefty profit margin, you may drive your customers to find value elsewhere. Too low, and you could lose out on a valuable opportunity to make money.

There are a number of tools available to small business owners seeking pricing assistance, including free calculators that include your target profit. You can start with this one from Shopify.

Getting Strategic with Pricing Models
The process outlined above can be described as cost-based pricing, wherein all costs involved in making the product or executing the service are calculated and then marked up with a profit margin. While this is a strong strategy utilized by many businesses, there are some other models you can explore, especially if you are in a market with high competition.

Dynamic Pricing

What if you could adjust your product pricing in response to real-time demand? This method, known as dynamic pricing, is ubiquitous among e-commerce sellers seeking to stay competitive in online spaces, according to business.com. Prime examples of industries using dynamic pricing are airlines and hotels — their prices fluctuate depending on demand, and they could increase or decrease even more significantly as the service date approaches due to how much availability they have.

Peak dynamic pricing can be attractive to small businesses offering seasonal items, such as outdoor equipment or cold-weather gear, allowing you to charge more when these items are most in demand. Inventory-driven dynamic pricing, meanwhile, is tied directly to your stock. If you have items in excess that you’re struggling to move, you can charge less to get them off the shelves. If a popular product runs low, you can charge more for the sought-after goods.

Value-Based Pricing

Your business may offer unique and valuable goods or services. In that case, you should explore a value-based pricing model for your business.

Value-based pricing is a strategy that relies on the consumers’ perceived value to establish the price. For instance, if your small business sells vinyl car wraps, you could charge more for a popular buyer-focused product with features or qualities focused on their wants and needs. It’s important to note that this pricing method reflects the worth customers are willing to assign to it, something that could change over time, according to Investopedia. As such, you must be in tune with fluctuating consumer perceptions.

Competitor Pricing

Keeping a keen eye on your competitors’ offerings could also be a strong business model. If you’re in a saturated market where others are selling similar or comparable products to yours, pricing your products similar to your rivals can help make sales.

Imagine you run a coffee shop in a bustling college town. For spring, you launch a new beverage: a matcha and lavender latte that’s sure to be a hit. There are a lot of shops in the area, and some of them offer similar drinks. You decide to charge a dollar less than you see elsewhere to foster a competitive edge.

Syrups are expensive, though, and it’s a careful balance your shop has to walk. If the low price isn’t enough to attract profitable business, you’ll likely have to raise the cost or adjust the offering. Perhaps, offer a ‘meal deal’ with a higher profit margin product to offset any potential loss on the beverage while providing even more perceived value to your customers.

Pricing is an important aspect of your business, one which can significantly impact its success or failure. With these tips, you can better understand how to price your products. The American Independent Business Coalition (AIBC) is here to help entrepreneurs achieve their small business dreams, whether they’re just starting out, expanding or exploring a new venture. To learn more about the benefits of becoming an AIBC member, visit aibcoalition.com.

Articles in this newsletter are intended to be informative, enlightening and helpful to you. While all information contained herein is meant to be completely factual, it is always subject to change.

Benefits may not be available at all membership levels. For more information, or to upgrade your membership, please call 1.800.992.8044.

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