Most startups and small businesses set prices too low, hoping to attract customers. In fact, very low prices can be a red flag to consumers and actually reduce sales. Implementing a low price strategy may disrupt the market and initiate a price war with your biggest competitor. Setting the correct price is critically important to the health and the bottom line of a business.
Before prices are determined, understand what it costs to run the business. The price must cover all costs and desired profits. There are several different methods used to calculate a price. Let’s examine a few of them.
The Cost Plus method simply begins with the cost of the product and adds the cost for labor and other overhead. Then the desired profit margin is added to determine the final price. This method is commonly used in manufacturing industries.
The Competitive Pricing model is generally used when there is an established market for a particular product or service. The quality of service and customer experience may vary widely from one company to another. Therefore, a “range” of acceptable prices exists in most industries. An example is a haircut may vary in price from $8 to well over $100. The very best products and service providers can charge a premium and still be considered competitive.
The Demand Pricing method uses consumer demand, based on perceived value to determine the correct price. Sometimes called “value-based pricing,” this method is effective when products are sold on emotion, if there is a temporary shortage of the product or if the product is indispensable and necessary. An example is the cost of drinks at a baseball game are about 800 percent more than you would pay at the grocery store. This method typically sets prices higher than any other method.
Regardless of the model you use, try to set the correct price for your products and services.