Price - How Much Should I Charge?

How Much Should I Charge?

Choosing the right price for your products or services is a crucial part of starting your business.

If you charge too much for your products, you run the risk of not selling enough product to bring in your optimal revenue. On the other hand, if you charge too little for your products, you have to sell larger quantities to maximize your revenue, which can be difficult to accomplish.

If you focus on creating value, instead of trying to undercut your competitors’ pricing, you’ll gain loyal customers, which will increase your revenue.

Pricing Basics

Pricing basics are clear-cut:

  • Your prices must cover your costs, while leaving a profit;
  • The most effective way to lower your prices is to lower your costs;
  • Your prices must be established before making your first sale; and
  • Regularly review your prices to ensure they’re covering costs, giving you a profit, and meeting market demands.

Pricing Strategies

When you’re determining your pricing strategy, there are a few things to consider:

  • What are your competitors doing?
  • How much does it cost to make each product?
  • How big of a margin do you want? Will that margin cover direct and indirect costs?
  • How much would you be willing to pay for your product?

Answering these questions can help you determine which pricing strategy is best for you.

Cost-Based Pricing

Cost-based pricing ensures that you cover all your costs and overhead, while generating profits.

If your materials cost $10, your labor costs $5, your overhead costs $5, and you want a 20% profit, you would charge your customers $25.

Markup Pricing

Markup pricing involves adding a predetermined amount to your cost to determine the price.

If your cost is $10, and you charge $15, your markup is $5.

You can determine your markup percentage by dividing your markup by your cost. In this case, your markup percentage would be 50%.

You can also determine your profit margin by dividing your markup by your price. In this case, your profit margin would be 33%.

Demand Pricing

Demand pricing is determined by volume and profit.

You’ll set different prices for different markets. For example, you might consider charging wholesalers less because wholesalers will generally buy more at a time.

Using demand pricing takes some getting used to because you’ll have to determine what price will generate the optimal profit to volume ratio.

Competitive Pricing

Competitive pricing is typically used when there’s an established market price. In a competitive pricing strategy, you’ll charge the same price as your competitors.

Competitive pricing is typically used for commodity products – products that are difficult to differentiate from one another.

If you sell a commodity product and choose to charge more than your competitors, be prepared to defend your price. Are you charging more because you offer better customer service? Or because you offer a longer warranty?

It’s also a good idea to know how price sensitive your market is. If you raise your price slightly, are you going to lose a lot of sales? If you lower your price slightly, are you going to increase your sales?