Typically, entrepreneurs are good at producing and delivering their products to customers. However, determining the right price level is often a challenge.
An entrepreneur often starts out with too low of a price. Beginners often think the price is high enough, yet the true costs are underestimated or less predictable costs are forgotten. All too often, entrepreneurs underestimate just how much time is needed to complete a task.
Emotional barriers also lead to low prices. The entrepreneur may be so passionate that money is not the priority. Others do not feel that their products or services are good enough for a higher price point. Some fear that an order will be lost if prices increase.
The first step towards setting better prices requires one to distinguish between the business’s income and the founder’s personal income. Making a decent salary is not enough, rather the business needs to make money to reinvested in marketing and product development.
When the price starts too low, it can take years of adjustment to find the right level. The second step in determining price requires the entrepreneur to choose a method. There are two appropriate pricing approaches: markup price or market price.
- Markup Price: Calculate the expense of given product order and add a percentage to account for profits. The percentage will vary with each product and market.
- Market Price: Determine what customers are willing to pay and then calculate profit backwards. Take the market price and subtract expenses to determine the profit.
Market pricing focuses on the value you deliver to the customers. Some customers may find value in a lower priced product that saves them money while solving their problem. Other customers may find value in a high-quality product that solves their problem. A high price signals high quality to the market.
With an established pricing approach, the entrepreneur can focus on salesmanship. A principle for good salesmanship is a “Special price for you.” The price must align with what customers are willing to pay. To do this, offer add-on products or products of different levels of quality. Not only do customers want to feel that the price is fair, but also that they are getting a good deal.
Setting the price high allows you to offer discounts so that customers believe they got a good deal. Customer loyalty programs, seasonal discounts, bonus systems, or mass discounts can be promoted. It is crucial that the price is high enough that the business makes more money, not less money, on discounted products.
Getting a good deal and knowing what to expect are key aspects of customer satisfaction. Most customers get accustomed to a given price. When raising prices, set your customers’ expectations. If you need to raise prices, let your customers know and simply place a sign “prices applicable through…” Letting customers know when to expect a price change is just as important as explaining why the price is increasing.
An arbitrary price increase may upset some customers. However, most customers will understand and accept an increased price for a better-quality product or service. Let your customers know that they will get more value at a higher price point. Customer expectations and perceptions are key to selling.
If you are wondering if your price is too low, consult a GrowthWheel adviser and learn how your business can make more money.