Pricing Goods and Services: Art AND Science
One of the trickiest tasks in a small business owner’s career is setting prices for goods and services. Mostly science with a healthy dash of art thrown in, pricing issues are more common in retail, restaurant and service sectors. Still, several fundamental rules do apply in the larger world of industry. Chief among these is the need for thorough advance preparation and effective price calculation based on reliable models.
Prepare to Price
Before pricing a product or service, thoroughly research your industry’s price structures. Start locally, then expand your search to regional, national - and if applicable - international markets. This is especially important when your offering is unique or new. While many variables can influence your pricing system, these are critical:
- Manufacturer suggested retail price
- Government or industry trade policies and regulations
- Possible consumer reaction at perceived overpricing
- Potential post-sale service requirements
- Market advantages, such as excellent support capabilities, strong Internet presence, convenient location of your bricks-and-mortar operation and the unique nature of your product or service
Also factor in what it costs you to do business. Criteria such as rent, utilities, salaries, advertising costs and office supplies all influence how you ticket products or services.
Pick a Model
Practicality dictates calculating the initial pricing of goods and services on a standard model. Cost-plus pricing - possibly the simplest system - involves setting prices on total production costs coupled with a specific profit margin.
Value-based pricing is a bit more complicated, so strong intuition comes in handy. In this protocol, pricing rides on what you believe customers will spend on your goods. For instance, if your company offers an exclusive product, such as custom-blended scents and perfumes, a value-based system could do your sales figures a big favor.
When your company grapples with inconsistent inventory turnover and seasonal fluctuations, a standard markup system might work well. This allows you a couple of options: ticketing slower-moving items at a higher rate to account for storage, or labeling rapid-sell products with lower prices to stay competitive.
Similarly, services such as gardening, awning installation, exterior painting/repairs and snow removal depend on weather conditions. In these cases, offering sales and special deals during slow seasons can help stabilize cash flow.
Another strategy worth exploring is competitive positioning. Simply price your goods and services at the competition’s going rate - then give customers something extra. Competitive positioning allows you to offer amenities such as superior product quality and incomparable customer service while protecting the bottom line.
A price lining model limits price ranges of selected goods and services. This strategy focuses on a targeted market segment likely to spend within the specified parameters. A “dollar store” with items set at that amount, or close to it, is a good example. Others include hair salons with $10 cuts, lawn treatments at under $50 or booksellers with no volume higher than $5. This method keeps inventory moving, reduces storage costs and steps up foot traffic.
For clearance sales and big “blow-outs”, consider using a multiple pricing system. For instance, buy one suit and get a second pair of pants; or purchase two pounds of strawberries at the one pound price. By the same token, a service-based company might paint three rooms for the cost of two.
Pricing at higher than the standard market rate can work, too. If you cater to a clientele that values exclusivity, personalized customer service or superior convenience, then paying a little more isn’t a problem. This protocol works best, of course, in more affluent communities.
Conversely, the quickest wayto price goods and services to sell is to undercut the competition. Keep in mind, though, that this method also reduces profits and limits your ability to deliver better customer amenities.
Finally, whatever pricing models you adopt, be realistic about your market - and willing to change direction if the system isn’t working. Observe sales and revenue trends for several months. If the results don’t satisfy you, then tweak the system until they do.
For detailed information on retail pricing across all 50 states, check out The National Institute of Standards and Technology http://www.nist.gov/, an agency of the U.S. Department of Commerce http://www.commerce.gov/