How Small Business Owners Can Determine Product or Service Pricing

Many new business owners are not sure what they should charge for their goods and services. Sometimes owners and managers of existing small businesses encounter similar problems when introducing new products or services that are distinctly different from their current offerings.

So what should your company charge for its goods and services? How do you determine what is the best price? Before I go on, first let me state that it is not necessary to get the product pricing exactly right from the beginning. Put another way, it is not necessary to hit the bulls eye on the right price from day one. Remember there is no such thing as perfection, so relax. The second thing to remember is that grossly undercharging for your products and services can be very dangerous. Undercharging is more dangerous than overcharging. It is relatively easy to reduce your price if you encounter a lot of resistance from your customers. You can provide a customer a discount for a number of reasons including buying in bulk, paying in advance, or simply being a great customer. Customers appreciate a price reduction.
However, it is nearly impossible to say, "Oh, by the way, I need to charge you more than I originally quoted you or billed you for."? What would you say if a company did this to you or your firm? The only way you would accept this was if there really was a documented error. Otherwise, if you made such statements, you would drastically reduce your credibility with your customer. Reneging upon an agreed-upon price is the opposite of providing great customer service and ensuring customer satisfaction. Customers do not appreciate unsubstantiated price increases.

To help you decide what to charge, determine what your competitors are charging. How do you do this? Obtain a price list from the competitor’s website or a distributor's website. Or, if the price list is not readily available, pose as a customer and call and request one. If you feel this is dishonest or you have to provide too much information to obtain the pricing, then find competitors in other geographic areas and contact them. You typically will not be a threat to them since you are not competing directly. Sometimes there are additional benefits to contacting out-of-area competitors. You may end up with a potential partner or a company that you can refer business to when the customer is outside of your geographic area or area of expertise.

Sometimes business and trade associations have pricing information. Inquire. If you provide a product or service to the government, winning bids are public information. Go online and search by NAICS code and key words for your good or service. See what pricing was included in those bids.

The information provided above primarily pertains to business-to-business transactions. If you provide a consumer-focused good or service, the competitor information is readily available. Go out and look at the prices at stores that offer your products and serve your demographic. Go online and do the same. Check out what is selling on ebay or Amazon and for what price.

Competitor research is key to setting pricing. Many companies base their pricing solely on their cost structure. Who cares what your cost structure is? Obviously, you do but the market should determine the price not what you need to break even. Determine the price from market data, then calculate how many products or service offerings you need to sell in order to break even. Then put a structure in place to go do just that. If you do not think you can make money at the price the market dictates, add additional value to your product or service offering in order to raise the price, re-package or re-purpose the product or service, or find another product or service.