Pricing your Products and Services
Thursday, June 19, 2014
by Kelly Weaver, Small Business Development Center Regional Director
One of the hardest jobs for a small business is effectively pricing their products or services. Effective pricing requires research on your costs, your customers, and the market.
Overhead costs, those reoccurring costs of insurance, rent, utilities, advertising, etc., are pretty clear cut. What is more difficult to determine is the cost of your products and labor, especially if the business makes its own products or provides a service. Beyond the actual cost of the product or raw materials, one must consider additional costs of freight, carrying costs of inventory, waste/shrinkage. These items can add 10% - 25% to the cost of the material itself. For labor, you must consider the cost per productive hour. Assume labor is being paid $15 per hour for an eight hour shift. However due to meetings, breaks, or other ‘down time’, their billable hours for that shift are only 6 hours. The hourly rate collected from the customer for those 6 hours must cover the cost of the full eight hours, plus benefits and taxes, plus a profit back to the business. You can quickly see the complexities of setting hourly rates.
With customers, you must know their key decision making factors. It is not always price. The old saying is Price – Quality – Delivery: Pick Two. If high quality and fast delivery are important to the customer, the product or service will command a higher price. If a lower price is important to the customer, then they will be willing to compromise on either quality or delivery. There are other factors that drive customer behaviors that can affect your pricing methods. For example, if customers want price certainty, consider flat rate pricing or price guarantees/price matching. If customers want ownership options, consider leasing or timeshare/subscription models. When you know key decision making factors, you can create a variety of price points based on various features of the product and the selling process. Understand what drives your customer and price accordingly.
Understanding the market means understanding your competition, that is to say, understanding what other choices your customers have. By understanding these choices, how they are priced, and how they compare to your products and services, you will be better able to price appropriately to the market place and customer expectations.
As you can see, there are many factors that play into the pricing decision. If your business’s pricing strategy is to lower prices and gain more customers, take a moment to look at all components (costs, customer desires, market/competition) and make sure it’s the right approach to take for your industry and the customers you’re trying to serve.
Kelly Weaver is the Regional Director of the Small Business Development Center in Aberdeen which offers free, confidential business consulting to start up and existing businesses. She can be reached at (605) 626-2565 or firstname.lastname@example.org. The Center is hosted by GROW South Dakota (also known as Northeast South Dakota Community Action Program).
Category: GROW SD