Main Content

Back to Blog List

How to Value and Price Your Product or Service
  • 23 October 2017
  • Eric Michaels

How to Value and Price Your Product or Service

There are many hurdles you have to overcome when starting a small business. Once you’ve translated your big idea into a working business model, you need capital, staff, and a solid business plan to carry you through the first phase of production. An important next step is to determine the appropriate pricing for your goods and/or services.

There are a variety of different pricing strategies that you can employ – from competitor-based, to cost-based, price bundling and even customer-based pricing (which takes into account customer demand for a product).

Do not take this task lightly: Your pricing model will play a major factor in your overall success.

1. Study the existing market

Start by researching the price customers currently pay for similar or relatable products/services already in the market. Is the local price higher/lower than what you see as a trend across national providers? Look into your competition and pay attention to how they price their products. In some cases, you may find that an established company clearly charges a premium for their goods. Well-known brands can sometimes leverage their name and status to charge more, but keep in mind, that they are the exception.

You also might see high-quality goods priced much lower than you’d expect, which may indicate that the products are mass-produced or that the business is taking a loss leader approach in order to generate broader awareness. It’s important to know what your products/services are worth, and what customers are willing to pay for them.

2. Calculate all of your costs

Small business 101 is to bring in more review than it costs to make, market and distribute. This maxim holds true for all businesses, from the lemonade stand on the corner to the biggest corporations in the world.

As the owner of a small business, you need to understand all aspects of your costs. This includes the costs associated with your materials, production, operations, packaging, distribution, and advertising. If you underestimate or exclude a component, you could find yourself bringing in less money than you need to stay afloat. You can leverage a variety of accounting systems to help you track your small business finances.

3. Choose a pricing strategy

Two common strategies for setting prices are: cost-based pricing and value-based pricing. Each has its own merits and risks, so carefully consider which method will work best for your business.

  • Cost-based pricing: As its name implies, this method takes all costs into account before adding an amount that will represent your profit and adds a markup on top of that. For example, imagine that it costs you $100 to bring a product to market. With cost-based pricing, you’re products/services are priced to give you your desired markup percentage – e.g., 40 percent. In order to keep operating and bring in the profit you expect, you may need to price it at $140 (or 40 percent above cost). Established brands may be more confident in this system than newer companies.

  • Value-based pricing: This method of pricing disregards cost on some level. If your market research tells you that your target customers want a product of premium quality—and they are willing to pay extra for it—you may mark up your price well above cost (say, 80 percent). New brands take risks by setting prices in this way, but if you hold strong and establish yourself in a premium niche, you can land ahead of the competition.

4. Consider the variables

National and eCommerce brands have additional variables to consider. Geography is one – the prices consumers pay in New York are higher than those in Alabama. State sales tax and shipping fees also come into account. Online retailers often promote free shipping, but if you plan to do so, you need to account for the shipping costs, somehow – e.g., wrapping into the retail sale price. Depending on the industry, your small business may be impacted by fluctuating costs in fuel, food, water, etc. You need to make sure you’re paying attention to any fluctuations in market pricing so that you can adjust your prices accordingly.

5. Adjust as necessary

Times change, the market changes, and some products do not age gracefully. Pricing should be an ongoing process. In the same way that no one can keep a home on sale at an inflated price forever, business owners should be prepared to lower their prices when items do not sell. Consider how you can lower costs while remaining profitable. On the other hand, if your products are flying off the shelves, it may be time for a markup.

It can be tricky to accurately price your product/service. But if you want to be profitable, it is crucial that you take all costs and variables into account before entering the market.

Back to Blog List