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How Do I Set Price Levels?

  • How to meet business goals in pricing products, and some considerations when pricing
  • For the early-stage business entrepreneurs
  • Increase sales and create an essential foundation for your business

Pricing your company’s products is one of the most important business decisions you’ll make. Setting a price too high can restrict sales, while setting it too low will constrict your revenues; either way, the wrong price can limit your business growth and cause serious problems for your cash flow.

Accurate pricing should be part of your strategy for meeting your business goals. You’ll also need to monitor market conditions to raise or lower prices as needed.

Calculate your costs

Naturally, you’ll need to charge more for your product or service than it costs to provide it. However, it’s easy for business owners to overlook certain expenses. Weigh all costs involved in bringing a product or service to market, including direct costs such as raw materials and labor as well as indirect costs like overhead expenses, which includes rent and utilities for a commercial space.

Consider the time it takes to provide a product or service as well. The longer you spend to complete a project or develop a product, the higher the price should be.

Conduct research to see what prices your competitors are offering. You can also check with potential customers, including informal polls of family and friends, to see how much they would be willing to pay for a product or service.

Decide what profit margin you are seeking to achieve and what the price must be to achieve it. A 10 percent margin is standard.

One option is to set a 12-month revenue goal as well as a target number of products you are hoping to sell or projects you are hoping to complete. By crunching the numbers, you can determine what price you’ll need to set to reach the desired revenues and whether this is a figure your customers will be willing to accept.

Pricing strategies

Your pricing strategies should be based on your target customer and what they’re looking for. You may want to set prices that attract customers because they’re cheaper than what your competitors offer, or offer a better service for a lower price. Alternatively, you might target a premium market by providing a higher quality product or service at a higher price.

If you’ll be facing minimal competition, you might start out with higher prices and gradually reduce them as more competitors enter the market. The opposite strategy involves getting a foothold in the market with lower prices, which are gradually raised over time.

See if your business will benefit from certain pricing incentives. You might offer bundling offers, where customers receive a discount if they purchase multiple products or services. You can also offer periodic discounts on certain products or services to boost sales.

When offering a service, decide if you’ll charge per hour or per project. The hourly rate can be set based on the annual income you hope to generate divided by the hours you plan to work during the year, while a per-project rate might include fixed costs for each service you provide.

When to raise or lower prices

Monitor the market regularly to assess any factors that might influence pricing. These could include increasing or decreasing demand, limited supplies, higher expenses incurred in providing a product or service, or changes in your competitors’ prices.

Occasional price increases are usually necessary, but can be done gradually over a period of several years or implemented in conjunction with promotions to make them more acceptable to customers. You should also track customer response to higher prices and track changes in sales to determine if the price hike has had a significant impact.

Lowering prices is usually not advisable, but may be necessary when trying to capture a share of the market or responding to competitors lowering their prices. You can also seek alternatives such as temporary discounts or trimming down on what customers can get for the same price (for example, food companies maintaining prices but reducing their package sizes).

Remember that pricing is only one part of your overall business strategy. You’ll also need to have a sound marketing plan for your business, and potentially sales staff as well to acquire customers.

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