Setting appropriate prices is one of the trickiest aspects of doing business for any size outfit, but the risks you assume by pricing incorrectly are even more significant when you’re an entrepreneur. Set prices too low and you could erode your business’s financial viability. Price too high, and you could fold because of low demand before you ever get a chance to succeed.
Here are a few “honesty” spot checks to consider when evaluating whether the prices you’ve established are justified.
You know your pressing business goals and the minimum price needed to reach them
Before you focus on price alone, arrive at a clear objective for your overall business strategy at this point in its life cycle (understanding that your goals will change as your business grows).
If you’ve been in business awhile and feel confident in your cash flow, you may indeed be willing to sell less, in the name of more profit. If you’re a new business and have invested in considerable money in hiring staff, obtaining inventory or equipment, and establishing an online or physical presence, it may be critical that you price your goods to sell – even if that means accepting slimmer profit margins in the short term. If the latter is your reality, a “cost-plus” pricing strategy can help to evaluate the baseline price you can accept considering the “real” costs you pay to acquire a good or deliver a service, and the indirect operating costs you absorb to do business.
You know how you stack up to your competitors
Your prices are appropriate to the extent your customers perceive value; much of that is derived by the expectations set in the marketplace by your competitors. For that reason, it’s important to know what your competitors charge for the same or similar products you offer – but not so that you can undercut their price. Instead, evaluate the sum of your competitors’ pricing strategies compared to their value propositions, including service and return policies, satisfaction guarantees, delivery times and free shipping. Using that information, focus on how you can offer a price that remains competitive with the rest of the marketplace, but promises even more value in a tangible and meaningful way to the customer, which may even include expressing the dollar amount that “add on” represents, in your marketing messages.
You’re willing to walk away
One of the most gratifying aspects of being an entrepreneur may be the ability to decide what your time and effort is worth; the amount you arrive at is essentially reflected in your pricing. If there’s a finite profit percentage expressed through your prices, or an hourly rate you’re not willing to compromise to increase sales, attract customers, or win more projects, that’s your entrepreneurial right, provided you’re comfortable with the level of business you are generating from your pricing model as it stands.
If you do wish to expand, however, you may need to take a “test and learn” approach to the market, by experimenting with ways to test enhance market perception of your prices, with limited-time offers, discounts, and/or bundled services or goods that can boost a value-proposition, beyond dollars and cents.
You’ve realized as many efficiencies as you can
When you uncover ways to “work smarter” (either by expending less time and effort, or by securing goods at a lower hard cost, in the sense of price, and the resource expenses involved in procurement) you stand to make more profit. Ultimately, those monetary impacts may be far more significant than passing the profitability burden onto customers. While monitoring your monthly profitability is a key aspect to arriving at a sustainable pricing model, your operational efficiencies are just as important in your path to profitability.
Despite the many pricing models that exist for businesses to use as a guide to structuring an optimal business model, the value of your service is really a matter of subjective perception – among your clients, and as it relates to the state of your business and your goals for it, at any given time. By identifying what you hope to achieve in the short and long term, and how your business offering compares to the many options customers have to choose from, you can determine if your pricing model is justified based on how it’s delivering on your unique objectives.
About the Author: Kristen Gramigna is Chief Marketing Officer for BluePay, a firm that helps new and small businesses accept and process credit card payments. She brings more than 15 years of experience in the bankcard industry in direct sales, sales management, and marketing to the company and also serves on its Board of Directors.