After investing hours researching your new business idea, it is easy for the new entrepreneur to forget that the essence of business is not how eye-catching your business card is or how well-organized your home office appears.
It is simply one reality-you must make a profit as quickly as you can and continue to make a profit every month.
The key to developing an effective plan for creating profit is your pricing strategy.
Setting your initial pricing schedule is one of the most demanding and most critical decisions you must make in preparing to successfully launch your new business.
Profitable pricing requires realistic cost estimation, accurate competitive analysis, a solid understanding of your marketing objectives and a lot of intuition.
We have not found one magic formula for setting prices. There are slightly different approaches for a manufacturer, a retailer, a service provider and a consultant. But each type of distribution benefits from an exploration of five key factors.
Four Keys to Pricing
There are four factors you should consider before you set your prices: your costs; your competition’s pricing; your desired image; and your income goal.
1. Your costs.
There are a variety of costs you must consider in order to set your price. Your costs represent the “floor” below which you should not go with your pricing. The three main costs you must consider are:
Personal living costs. These costs include that part of your family budget you are expected to pay each month plus the new costs of self-employment, including health insurance premiums and income and social security taxes.
Direct business expenses. These include any expense directly related to producing a product or service, such as raw materials or labor costs.
Business overhead expenses. These are sometimes called “indirect expenses” because you are expected to pay them whether you make any sales or not. Examples of overhead costs are rent, telephone, car expenses or equipment purchases.
2. Your Competition’s Prices.
Be careful not to put too much emphasis on your competition’s pricing when you set your own prices. First, make sure you are offering something very similar to your competitor. Whether you can go higher in price depends on how successful you are in making your product or service look better and different to the customer.
3. Your Image in the Marketplace
If you’ve devised your selling story to build on your company’s unique strengths and you present those strengths as strong customer benefits on your website, it is quite likely that prospective customer’s will see your offering as cut above that of your closest competition. When this happens, suddenly the customer is no longer “comparing apples to apples” when it comes to pricing. They see you offering more than others and are therefore often willing to pay you more for it.
4. Your Income Goal
Believe it or not, quite often when developing a new product or service you can start with a desired level of new income you’d like to make from selling the item or service and then work backward to how much you need to charge for each unit of product or service in order to make this happen. For example, sometime back I created a new online course-coaching combination. I thought that with some reasonable level of promotion I could attract 20 users per year. My personal income goal was $50,000 of new income. By dividing this dollar amount by the total number of expected customers (20) I set the pricing for the product at $2500 per person.