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How to Determine Price Points

By Barbara Beauregard   |    August 17, 2015   |    10:08 AM

Use These Strategies to Decide What to Charge for Your Goods and Services

Determining a fair price for your products or services is one of the trickier parts of owning and running a successful business. The prices that you charge customers will have a large impact on the overall success of your business, after all, and many different factors need to be taken into consideration. You’ll need to consider the market that you’re operating in, like whether or not you’re a luxury product or service, or one of the more economical choices that are available. You also need to determine what the market will bear, how much you need to earn to make a profit, and what the competition is doing.

It might sound like a lot of information to digest, but determining price points doesn’t have to be rocket science! Keep reading to learn more about how to determine price points for your business.

Do your market research first

First, begin researching pricing for similar goods or services in your market. If you’re operating in a well-established market with large amounts of competition, there’s a chance that you won’t have as much leeway in determining your prices—unless you can strongly differentiate your business from others, that is.

A study by McKinsey noticed that 80-90% of “poorly chosen” prices are actually too low. And, as the article also points out, if you set your initial prices too low, it can be nearly impossible to successfully change them. Avoid this profit-limiting mistake from the very beginning by doing comprehensive market research.

Determine your “cost of goods sold”

If you want to make a profit, you can’t sell your goods or services for less than what they cost you to develop or acquire. To calculate this number you’ll need to figure out exactly how much it costs to get your product or service to a customer. Development, overhead costs, marketing, employee costs, labor, materials, and other factors all go into the creation of what you’re selling.

This one number may surprise you, so don’t gloss over this important part of pricing.

Understand your customers

Now, it’s time to think about your customers. Who are they, how much disposable income do they have, what problems do they need solved? If your product or service solves one of their more pressing problems, are you solving a big problem, or a smaller issue? While this part of your research is often more of an art than a science it’s important to understand exactly how your business will impact their lives.

You might think that your new idea is truly innovative, but does your target customer feel the same way? Take Square as an example. It’s an innovative product that allows mobile credit card processing, but it’s not priced at a premium. Why? The creators realized that the improvement to retailers’ bottom lines wasn’t earth shattering, and they priced accordingly.

If possible, test your pricing or offer different pricing structures

Ideally, you’ll be able to test out your pricing before hitting the market. However, remember that it’s typically easier to adjust prices downward, and much more difficult to raise prices. One great way to test out different pricing is to implement various pricing structures.

You can try offering a subscription service, or charge more for a super-charged premium version of whatever it is you’re selling. For physical products, you could explore the differences between selling directly to retailers versus selling to wholesalers. Regardless of the method you choose be sure to keep comprehensive records and data so that you can analyze what’s working and what isn’t. It can be difficult to choose the perfect pricing, but with careful research and planning, you can hit the sweet spot between what the market will handle, and what makes you a profit.