One of the most difficult decisions facing every business owner is trying to determine the proper price level for your services and products. If you price your goods and services too high, you risk loosing clients to your "cheaper" competition. If you set a low price, your clients may think that your goods and services are inferior in quality or you may even find yourself losing money on each sale.
When you start the process of setting prices, it is important to remember that each sale must pay for your variable costs, overhead costs and profit. For example, if you are running a restaurant, each sale must not only cover the cost of the food ingredients but also a part of the rent or mortgage, serving staff, cooks, equipment, supplies, licensing and even items as simple as mops and cleaning supplies. All your hidden and indirect costs must be calculated into the price of your offerings or you may discover that despite good sales, you are not making any money at the end of the day.
Not only you have to carefully calculate all of your hidden costs when setting your prices, but also you must continuously re-evaluate these costs to ensure that they have not changed significantly enough to affect your bottom line. Your employees will expect raises, utility costs are ever increasing, interest rates change, and most costs are rising. All of these occurrences will have an effect on your profit margin and must be continuously accounted for in your prices.
Having you finger on the pulse of your industry is also critical when determining what will be your pricing policy. If all your competitors are offering a price significantly lower or higher than yours, you may find yourself in a difficult position. The public is more price conscious than ever before and having a price list that does not match the industry norm must be treated with caution. If your prices are too high in relation to your competitors, your clients may look elsewhere for a better deal; too low and your clients may think that your goods and services are inferior in quality.
If you are planning to offer an alternative-pricing schedule, properly marketing this decision is key. You must get your message out to your potential clients and explain how this non-typical pricing benefits them. It may be wise to consider combining products or explore threshold pricing to make your offer appear more traditional and valuable to your customers. Decisions of this type can be very industry specific and making an informed decision would depend on your knowledge of what your competitors are doing and what is standard in your industry and area.
When setting prices there are two main concepts to keep at the forefront of your decision making process. First, information is like gold, the more you have available to you before you set your prices, the more likely you are to choose price levels that will serve your business well. Secondly, setting prices is much like flying a kite; you must continuously be adjusting and re-adjusting your offers. Standing still and being inflexible can result in an unexpected crash.
Consider this: if you are in a high volume business, adjusting your price by a few dollars up or down may generate significantly higher dollar sales or significantly higher volume of sales. With majority of your costs being fixed, this would directly impact your bottom line. Also, price is not the only thing. Consider adding some extra value to your offers. Something like free shipping or extra warranty may significantly increase your sales and add to your profit. Testing is the key.
No comments:
Post a Comment