Learn How To Price Your Products & Services

Some businesses don't have to worry about pricing because there is a market price for their goods or services that can't be modified, such as the price of developing a role of 35-mm color film at a Photo franchise shop, for example. But most businesses have to decide how to price their goods or service and whether it will be lower, the same as, or higher than the market price.

The price you can charge above what is needed to cover overhead is usually not a matter of supply and demand, although traditional economists might try to tell you otherwise. For most businesses, the price charged determines the type of client the business will have, not the number. Usually, changing the price only changes who your customers will be. A low price will attract few customers if you don't offer what they want, and a high price can bring in many if you do.

The price of your merchandise or service tells the customer a lot about what they can expect from your business. A low price often means that customers must serve themselves and that there will be no refunds or returns. In a service business, it implies amateurism and inexperience or, at best, that you're dealing with a start-up. A high price can often mean the opposite.

Prices that are out of line with those of similar businesses need to be justified to customers through added value. Customers will sort themselves out according to the value they want, and those who choose your business will do so because you meet or exceed their expectations. For example, a marketing research consultant who charges $1,000 per focus group research session will be expected to show up twenty minutes before the session to discuss it with the client. Afterwards the consultant will deliver an audio-tape and a one-page summary of the session. The same consultant charging $2,000 per session will be expected to meet with the client for at least an hour during the week before the session, to hold the session in an interview room with a two-way mirror and a video camera, and to deliver a verbal presentation and a five to ten-page summary a few weeks later. The pricing determines the client's expectations.

Pricing is subjective. You have to charge enough to make it a job worth doing - so that it pays for itself. And you can't charge so much that people are put off by the price. Pricing is not that important to a lot of people, particularly with small businesses. People are more interested in quality than price. If you're a good auto mechanic, customers will happily pay you $35 an hour, rather than risk leaving their car with someone they don't know who charges $20 an hour. Unless it gets outrageous, price will not scare people away.

There are three basic rules to follow when you are determining the price for any product or service:

(1) pricing should be easy to understand,
(2) the price should be complete, and
(3) the customer should have a reasonable number of pricing options.

The price should be complete. Not only should the customer understand how you arrived at your price, but it should also be clear to them that there aren't any surprises. Just recall for a moment the kind of pricing that charges you for every little part. "On sale now! This computer only $599 (keyboard and monitor not included)." What good is a computer without a way to put in data (keyboard) and a way to see what you're doing (monitor)? This is a form of deception, and not a very subtle one. Most of us would much rather see "This computer is only $999 (keyboard and monitor included)." It instills a much higher level of trust.

Last but not least, the customer should have pricing 0ptions. On the one hand, we've just implied that you should lump the components together and tell the truth about the minimum combination that is actually usable. On the other hand, one way to give customers a reasonable number of pricing options is to break the system down into interchangeable parts. The choice is yours and you must find what works best for your business and your potential customers.

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