Do you know how to set up the right prices for your products and services? Price for which you will sell your products or services is one of the most important factors of your business success.
You can have a great sales process, you can have a big amount of customers, make big amount of income, but your business to not make a profit. The biggest reason for this is a wrong price of the products or services you have set up.
Mistakes You Can Make When Set Up Prices for Your Products and Services
In the process of setting up prices you can make two different mistakes:
- Undervalued prices of your products and services. This mistake means that you sell your products or services with prices that are under real market value. In such a way, you lose some amount of money as a profit for your business. You have customers and you have income, but not the right or full potential profit.
- Overvalued prices of your products and services. This mistake means that you sell your products and services with prices that are over real market value. In such a way, you can lose some amount of customers and your income after some period of time will start decreasing. When income starts decreasing, you can expect also decreasing profit.
What Happen When You Don’t Set Up the Right Prices?
Let’s see what happen when you don’t set up the right prices?
For example, some product that you sell can be sold at $100.00. Your competitors sell the same type of the product for $100.00. If you decide to sell that product for $90.00 and that product cost you $85.00 you will have $5.00 in profit when you sell one.
If you can sell 1000 pieces of the products your profit will be $5,000.00. However, If you sell for the same price as your competitors you will have a profit of $15,000.00.
Do you think that with the price of $100.00 you will lose some of the customers? It is possible, but you will not lose 70% of customers that will bring you the $5,000.00 in profit as with a $90.00 price. Let’s see some simulation:
You can see that you will need to lose 667 customers to come on the previous level of profit of $5,000.00. This is 66.7% of your customers when you sell with a $90.00 price. It is very low probability that you will lose such amount of customers. Maybe you will lose some percent of customers, but not 67%.
If you sell the product with $90.00 your business potential energy will be smaller because you don’t utilize the full potential of profit that you can make with the real price.
First of all, your prices must ensure that you will cover all your business cost (fixed and variable costs). The second thing that your prices will need to provide is to bring the biggest possible profit to you.
10 Steps to Set Up the Right Prices
Here, I want to share with you 10 steps you will need to take if you want to ensure that you set up the right prices for your products and services. The right prices are the prices that will ensure the biggest profitability for your company.
- Know your metrics. You must know the real numbers of your business. Here I think about numbers as a cost of products, other business costs, margins, sales numbers and so on. When you know the real numbers, you can set up the right prices that will cover the costs and will bring profit. When you know these numbers, you will exactly know how much will cost you the product for which you set up prices.
- Sales forecast. You must perform forecast of your sales numbers as the number of pieces that you can sell in the next period of time. Let’s take an example. The products cost you $80.00 for a piece. This cost is the cost of production or cost for purchasing. However, you also have fixed costs of $5,000.00. If you plan to sell 1000 products then you must add $5.00 ($5,000.00/1000) to the final cost of your product. If you plan to sell 800 products then you must add $6.25 and your product will cost you $86.25. You can download our sales forecast template.
- Profit. In this step, you must ask yourself how much would you like to earn from your business in a specific period of time. If you want to earn $2,000.00 at the end of each month then you must add $2.00 to the cost from previous step if you sold 1000 pieces. Now the price will be $87.00 that will cover all of your business costs and bring you the profit of $2,000.00. If your sales forecast is that you can sell only 800 pieces of the product then you must add $2.50 to the costs of $86.25 and the price will be $88.75.
- Market. In this step, you must perform market research related to the prices of the same or similar products that exists on the market. If you find that same or similar products to yours are selling from competitors for $90.00, then your price is OK. In such a case you can choose to sell for the same price and you will make more profit. However, sometimes you will find that your competitors are selling their products for a lower price than yours. In such a case you must perform additional steps described here.
- Check your costs. If the competitors are selling their products for very low price that your metrics doesn’t allow you to sell with the same price, you must check your business costs and find possible ways to decrease them.
- Check sales forecast. Can you sell more quantity of your products? If your competitors are selling the products for low prices, and you cut all possible costs, but still you cannot use their prices, you must find ways of increasing the sales numbers of your product. By increasing the amount of the sale, your fixed cost per unit will be smaller.
- Image. When you finish with all previous 6 steps it is time to think about your business image. If you succeed to build an image of prestige, you can easily increase your prices. This is one strategy that will make your products to be seen as products with better quality than the products of your competitors.
- Services. Add additional services to your products that will increase the value of the product to your customers. With additional services, you can charge more money for the same products and will bring good reputation for your business.
- Try to find ways how to increase prices for more profit. If there exist some chances to increase the prices you need to utilize that. Think about that possibility and if you can make more profit don’t give up from that possibility.
- Start the process again. When you finish with all previous steps you must start again with the whole process. This is a process that will never end, and if you set up the right prices and forget them, when market conditions will change you will find yourself in a big trouble.