Ask Score: Setting the Right Pace
One question all business owners are commonly challenged by is how much to charge for a product or service.
This is not surprising. Pricing is at the very core of the framework that eventually will determine the success of the business and the financial reward to the owner.
Developing a pricing strategy depends on several factors, such as the type of product or service, the costs to provide it, the anticipated profit, the average rate for the kind of industry the business is in, and many other factors. This makes finding the answer tricky.
Finding just the right balance between all of the factors involved is more art than science. Pricing too low can cut into profits, while overpricing also can hurt the business.
A common misstep - especially in the early stages of a business - is pricing too low in order to attract customers. While special deals can work in some cases to start the ball rolling, going low is not always the best path.
Low prices can draw customers interested only in price. They are the ones most likely to walk the moment they find something even lower elsewhere.
Selecting excessively low pricing levels to attract clients is particularly dangerous for service businesses.
There are only so many hours to sell. A service business can't "make it up in volume" like a retailer who still profits from lower prices if volume is high enough.
Pricing, of course, is partly psychological. The desired perception of the business's product or service "brand" in the marketplace will have a great influence on the ultimate pricing decision. That means setting the levels in accordance with the image being fostered for the business.
If the business wants to be considered as offering a premium product or service, the pricing can be higher to match an upscale image. This is another way of saying that a business must pay attention to price points. They differ widely by product and industry.
Pricing is an ongoing process, so it must be tested periodically. That will require adapting to changing conditions.
Competitor prices, costs, customer perceptions and profit expectations can all change. Or maybe it's simply testing different pricing levels to see what works best for the business.
It is always best to research the norms for the industry, including price ranges across the country if the business sells nationwide. It may be desirable to charge more or less, depending on desired brand positioning.
Good business practice requires a business to use timely and accurate information to calculate costs for labor, supplies, and direct and indirect overhead for every product or service offered.
"Guesstimates" are not good enough and, in the long run, may cost far more than the hour or two of research. Also, it is necessary to take into account seasonal fluctuations that might cause short-term increases.
To learn more about pricing, contact SCORE, America's free and confidential source of small business mentoring and coaching. SCORE is a nationwide not-for-profit association of experienced business people who provide free, confidential counseling to small business owners.
The Sandhills chapter is active in counseling, mentoring and presenting free business seminars. If you wish to speak to SCORE about your business, please register as a client by entering your information at www.edmis-score .org/0364 and one of our counselors will contact you.
In addition to counseling by appointment, the Sandhills chapter of SCORE has drop-in service, for those who have registered, from 10 a.m. to noon Tuesdays and Fridays at the Moore County Chamber of Commerce building, on U.S. 15-501 in Southern Pines. The phone number is (910) 692-3926.
More information on SCORE's counseling activity can be found at the Sandhills SCORE website, www.sandhillsscore.org.
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