“How much is it?” is a rollercoaster of a question for a business owner. On one side is exhilaration: The customer wants to buy my product or service! On the other is self-doubt: What if the customer balks at my price, or agrees so fast I know I’ve sold myself short? Let’s jump into understanding the art and science behind the perfect price tag.
First things first. No matter what advice you hear about gauging what customers are “willing to pay,” your prices need to reflect a sustainable profit margin for your business. A fair price starts by covering these basic business costs:
When you’re setting labor costs (i.e., your and your employees’ salary), keep non-billable hours in mind. Customers don’t pay you for the time you need for marketing, strategy meetings, administration and so on. Your hourly rate needs to be high enough to compensate for the “behind the scenes” hours you spend keeping the business running.
One method of calculating pricing is known as keystone pricing. Using the factors listed earlier, calculate your “break-even” price for goods or services. Then, double it. Some sources say this is your final price, while others say this figure represents your wholesale price for other buyers and you should double the price again for retail.
To make matters more complicated, some goods, or even some industries, tend to operate on significantly higher markups than the keystone pricing model. Products like eyewear and lingerie sometimes sell at a 1,000 percent markup. Prices on services for weddings are also often marked up from similar services for other events. Get as much information as you can to determine what your customers might consider a fair price. What are competitors offering? What’s your target customer’s spending budget? Are you selling an everyday staple or a luxury?
Most businesses tend to either favor a cost-based model, with price as a key selling point, or value-based, where an extra special experience justifies a higher price tag. Which model suits your business?
Sales frequency makes a difference as well. A shop where regular customers visit every week may be able to support a lower profit margin per transaction than a company customers visit once or twice a year. If you’re offering higher prices than competitors, let customers know what they’re paying for. Free, same-day shipping and no-questions-asked returns solve some of e-commerce shoppers’ biggest worries. Even if you’re cost-based, don’t make undercutting the competition your top strategy. Higher prices may suggest quality, according to some consumer psychology theories. You don’t need to race to the bottom to get customers in the door.
Some companies thrive using a different pricing model entirely. One of these options might fit your business, or be useful for a special promotion:
Are your prices too high, too low or just right? What’s your most pressing question about setting (or raising) prices? Tell us in the comments!