Pricing is a task that puzzles and frustrates many small-business owners.
Some think good pricing is magic, while others dig deep into their financial records to come up with a very specific price point for each product and service.
Business owners are frustrated by wanting to be perceived as offering a competitive price to maximize the number of customers they attract, while at the same time desiring an acceptable rate of return for their investment of time and money.
Getting to the price on any product or service is a process. The price charged someone involves some science and some art.
The science part relates to determining two specific price points: the base or your break-even point where all basic costs are covered, and the ceiling, the point above which you won’t sell anything.
The break-even point comes from your financial records. If you are not yet in business, then you develop it from your pro forma records, or in other words, your projections. What are the direct costs of materials and labor you have in your offerings? In addition, what is your overhead?
Many business owners stop at that point and assume they have their break-even point or the bottom of this price range. Yet routinely, two items are not included. The first item is taxes. Your goal is making a profit so you will have income taxes. You also will have sales tax, which surprisingly often is forgotten. Also, you have required costs such as unemployment insurance and FICA.
A second overlooked cost is a charge for the owner’s time. Business owners probably have included their time in making the product or service. However, they may not have included their time in making the sale, ordering the supplies, paying the bills, etc., which are actions required to run the business.
Inclusion of these two items, along with the costs, provides the true break-even point.
The upper price point is the maximum price anyone will pay, determined typically through market research.
Now comes the art. Where in the range of potential prices is best for your business?
Sit down and consider:
- The image you want your store to have
- Whether your offering is a fad or a trend
- Who is your competition? How are you different from them, and can you maintain that distinction?
- The state of your industry and the local and global economy
Often, owners go low as they put all of these factors together. The focus is on sales instead of profit. Then you face trying to raise prices, a difficult task.
The pricing process is an area within your control. It allows you to set the direction of your business. Practice the art and the science on a daily basis and reach your goals.
And in doing all of this, remember the words from Field of Dream, “people will pay” if you give them what they want.
- About the Author
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Glenn Muske is an independent expert on rural small business, working as GM Consulting – Your partner in achieving small business success. He provides consulting, and writes articles for county extension agents and newspapers across North Dakota. Previously, he was the Rural and Agribusiness Enterprise Development Specialist at the North Dakota State University Extension Service – Center for Community Vitality.