Determining the proper prices for your small business products and services is among the most perplexing issues for new small business owners. You want to be competitive, particularly in today’s cost-conscious buying environment, but also cover your costs and make a reasonable profit.
Too often newcomers to entrepreneurship fail to account for everything running a business entails. Among the many costs that are easy to forget—until you have to pay them—are payroll taxes, self-employment taxes, fees for accepting credit cards, health insurance and other benefits, and a variety of overhead expenses.
Rather than simply guessing or simply going by what the competition charges, every small business should develop its own pricing strategy. In addition to accounting for all costs, research the norms for your industry, including price ranges across the country if you sell nationwide. You may want to charge more or less, depending on your brand positioning. Also, determine how much profit you want to make, and understand the relationship between selling price, profits, and volume of sales needed to achieve the desired profit.
You may also consult the U.S. Small Business Administration’s free guide, Pricing Your Products. It does an excellent job of discussing basic price-setting criteria and includes some worksheets to help make sure you do account for all your costs.
A common tactic for many start-ups is to offer discounts early on to lure business. Use caution when considering this approach. While it can provide a new business with helps experience and portfolio-building, it can also backfire.
Discounting can lower the perceived value of the product or service, or make the customer think you lack the experience/resources to do the job. If you underestimate costs or overestimate the volume that will be sold, the outcome will be reduced profits or a loss.
Periodically resurvey both your market and your pricing strategy to make sure you’re still in synch with your costs. It’s easy to be caught unawares by hikes for supplies or administrative costs. Consider and implement price increases judiciously. And if a large increase in your prices is necessary, be proactive about explaining the reasons to your customers. If you continue to provide the high level of value they’ve come to expect from your business, most will accept the higher cost.
For more help with pricing strategies, please request a SCORE Mentor and we're happy to help set up a plan for success.
About the author: David Inskeep is a retired commercial lender, 38-year military veteran, and college educator. He can be reached at firstname.lastname@example.org.