Price for which you will sell your products or services is one of the most important factors for your business success. You can have great sell, have a big amount of customers, make great income, but your business will not make a profit because of wrong price of the products or services. In the process of setting prices two mistakes can be made:
- Undervaluation of the prices. This mistake means that you sell your products or services with prices that are under real market value. In this way, you lose some amount of money as a profit to your business. You have customers and you have income but not the profit.
- Overvaluation of the prices. This mistake means that you sell your products and services with prices that are over real market value. In this way, you can lose some amount of customers and your income will decrease and also the profit.
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 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 $90.00 price. Let’s see some simulation:
You can see that you must lose 667 customers to come on the previous level of profit of $5,000.00 that is 66.7% of your customers when you sell with $90.00 price. This is not realistic. 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 potential of profit that you can make with the real price.
First of all, your prices must provide covering of all business cost (fixed and variable costs) and to bring profit to the entrepreneur.
10 Steps to Set Up Prices
- Know your metrics. You must know the numbers as a cost of products, other business costs, margins, selling numbers and so on. When you know the real numbers you can set up real prices that will cover the costs and will bring profit. When you know these numbers, you will exactly know how much will cost you that product.
- Selling forecast. You must perform forecast of your selling numbers as number of pieces that you can sell in the next period of time. Let’s take one example. The products cost you $80.00. This cost is cost for production or cost for purchasing. However, you also have fixed costs of $5,000.00. If you plan to sell 1000 products than you must add $5.00 ($5,000.00/1000) to the final cost of your product. If you plan to sell 800 products than you must add $6.25 and your product will cost you $86.25.
- Profit. In this step, you must ask yourself how much would you like to earn from the business. If you want to earn $2,000.00 at the end of each month than 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 obtain all of business costs and bring us profit of $2,000.00. If we forecast that can be sold 800 pieces of the product than we 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 analysis of the prices of the same or similar products. If you find that same or similar products to yours was sold from competitors for $90.00 than your prices is OK, and you can choose to sell for the same price. In this way, you will make more profit. However, sometimes you will find that your competitors selling that products for lower price than you must perform additional steps.
- Check Costs. If the competitors selling their products for very low price that your metrics doesn’t allow you to sell with the same price you must check the business costs and find possible ways to decrease them.
- Check selling forecast. Can you sell more pieces of the products? If your competitors sold the products for low prices, and you cut all possible cost but still cannot obtain their prices you must find ways for increasing the sales of the product. With increasing the sale fixed cost per unit will be smaller.
- Image. When you finished with all previous 6 steps its time for thinking about an image. If you want to build an image of prestige than you can increase your prices. This is one strategy that will make your products to be seen as more quality than the products of your competitors.
- Services. Add additional services to your products that will increase 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 chances to increase the prices utilize that. Think about that possibilities and if you can make more profit don’t give up from that possibility.
- Start the process again. When you finished with the previously steps you must start again the whole process. This is a process that never ended, and if you set up your prices and forget it when market conditions will be changed you will be in trouble.