I enjoy mentoring new businesses. One of the most common questions I hear from new business owners is “How should I set my price?” Here is what I tell them.
Know the price your competitors are charging. Gather as much information as you can regarding what your competitors are charging and why. Make certain that for each price you know the specific products, options and services that are included.
Know your lowest possible price. For each service/product list all your costs including supplies, staffing, shipping overhead and follow on services. Then for each service/product add your minimum margin (the money your business needs to make above the costs for that item to be viable).
Compare your competitors’ prices to your lowest possible prices. It helps to build a table of each service and product and list your prices in one column and the prices of competitors in other columns. Then study the options below and select the option that works best for your business.
Lowest Price Option
Consider being the lowest price competitor when:
- You know you can sustain the price for a long time.
- You know that your competition can’t come near that price because their overhead and other costs are higher and they don’t have the funding and can’t get the funding to offer your price or lower.
- You know that another competitor can’t enter the market and offer a lower price.
Don’t aim to be the lowest price competitor when:
- There already is or is likely to be a competitor who has the funding to drop below your lowest possible price. A competitor who has adequate funding can drop their price just long enough to get your customers to switch and make you raise your price or force you out of business. It is important to note that customers who shop for lowest price are fickle. As soon as your price is no longer the lowest, they’ll feel fully justified in moving on. Don’t count on their loving your services/products so much that they will stay even when you’re no longer the lowest price.
- Prospects who are shopping for your services/products may think yours are substandard in quality because price is associated with quality in your industry.
Highest Price Option
Consider being the highest price competitor when:
- You have at least one story of success that you can share. If you have done the same work or made the same product for someone else and can tell prospects that you significantly contributed to that success, you can command a high price.
- You know that you and your services/products are worth it. Prospects can smell confidence. They’ll believe you’re the best if you believe it.
- There are sufficient prospects for your services/products for you to sustain your business.
- You can achieve and sustain the level of service and quality that your price promises. Some businesses can and do pay a lot of attention to the total customer experience so that they sustain the service quality through every aspect of the relationship.
Don’t aim to be the highest price competitor when:
- There are too few prospects to buy your services/products. You could become too dependent on only those few so that those customers and not you would control your business. In addition, you could wind up alienating other prospects by being perceived as being too “high falutin” for anybody’s good.
- You’re not confident that you are better than the rest and you have no story to tell of past success.
- You don’t know how to sustain being the best quite yet.
Middle Price Option
Consider being a middle priced competitor when:
- You want the greatest flexibility in pricing.
- You don’t have a great story of success to tell right from the get go.
- You have no desire to make huge waves amongst your competitors right from the get go as either lowest or highest price may do.
Don’t aim to be middle priced when your business model is really better suited to either lowest or highest price.
Pricing to the Level of Responsibility
There is a phenomenon that I call “pricing to the level of responsibility” that occurs when a business charges higher-end prices. This phenomenon is desirable. The phenomenon looks like this:
- A business charges a high price;
- Prospects believe that the business is the best because it charges a high price. The logic is thisâ€¦ “After all, who would have the ‘chutzpah’ to charge the highest price if they didn’t really deserve it?”
- This logic can carry on into the contract. “If we’re paying this business this much money we must use its services/products and listen to its representatives so that we can fully implement their recommendations in a timely manner. After all we don’t want to waste all that money we’re spending.”
This phenomenon should never be leveraged simply to secure a high price because the customer will see through this and be greatly offended.
However, this phenomenon can be very helpful in situations in which the customers’ commitment to the project needs to be high. It causes both the customer and the vendor to work together as a team and can truly support a successful result.
Finally, when a business defines its pricing, it can confidently communicate this to prospects and customers. Clarity around pricing helps set a positive tone for the business/customer relationship. The earlier a new business can set its pricing, the more quickly it can move towards success.
For more information contact Elizabeth Paulsen at 206.244.9092 or firstname.lastname@example.org.