A tricky question for many businesses – especially start-ups – is what price to charge for a given product or service. It’s even more complicated when you consider that within a given industry, there’s liable to be such a wide range that it’s difficult to pin down your price point. So, let’s take a look at some things to do when trying to figure out what to charge.
Know what your vertical and closest competition charge. Although the wide range caveat above applies, it’s important to know what the range of your market is. It’s a starting point and frame of reference to draw from.A way to narrow down the range – figure out who your closest competitors are in terms of offerings and target markets, then find out what they’re charging for their products.
Factor in *all* of your costs when determining your expenses. It goes without saying that the final sales price needs to not only cover expenses for materials and labor, but also overhead, taxes, legal costs (such as business license, patents, etc.), and a myriad of other line items. Your price needs to account for everything – not just the most obvious and basic business expenses.
Estimate your projected sales volume. Plan an estimate of how much you think you’ll sell. One of the biggest causes of lower than expected margins is having higher than anticipated costs, and overproduction can be a significant component of that. Once you have a better idea of volume at a given price point, you can modify according to your data and the current market conditions.
Calculate value of the outcome for your buyers and compete on that, not price. One of the biggest pricing mistakes we see in the B2B sector is organizations that fail to consider the value of the outcome for the buyer. If your offering will result in, say, $500,000 of value (whether increased revenue or savings), your price should reflect that (after accounting for the other factors discussed above).When you focus on value, you’re much more likely to come up with a realistic price point. You also then have the evidence to be able to overcome price objections.
Think about employing Van Westendorp’s Price Sensitivity Meter. Devised in 1976 by Dutch economist Peter van Westendorp, the Price Sensitivity Meter asks four key questions to formulate a pricing range from a potential purchaser’s perspective:
- At what price do you think the product/service is priced so low that it makes you question its quality? (Poor quality product/service)
- At what price do you think the product/service is a bargain? (Great deal)
- At what price do you think the product/service begins to seem expensive? (Expensive, but might be worth it)
- At what price do you think the product/service is too expensive? (Horrible deal)
Note that this formula will not work for all products and services, but it does provide a data point of price ranges to figure out what the current market will bear. It’s also a method that, if used, should be in conjunction with the other methods outlined above, rather than the sole determinant.
Where the Price Sensitivity model is most useful is for innovative offerings that don’t have a comparable competitor in the market.
Recognize that your price will not stay static. Setting a price doesn’t mean that’s the number for all time. Changing marketing conditions will lead to a shift in costs, and you’ll need to respond to that by adjusting your own pricing. As an additional tip, it’s better to incrementally increase prices over a longer span of time rather than a massive price jump all at once.
Pricing might be the great bugbear for a lot of businesses, but it doesn’t have to be. Researching and creating a constellation of data about the present conditions in your vertical and target markets, combines with accurate assessment of the value your products bring to hit the pricing sweet spot.