Pricing is elusive, painful, constantly changing, and based on hundreds of different factors," says Arie Shpanya, the CEO of tech disrupter and dynamic-pricing leader Wiser.
Deciding what to charge, whether you sell a product or a service, is rarely fun, but it is necessary. The idea is to find that sweet spot where you can make a profit, but where you are priced so that your customers are willing to pay.
Covering Your Costs
The first step to setting prices in your small business is to make sure that you can cover your costs. In my case, covering costs is fairly simple. I'm a freelance writer, so I just need to be able to cover the cost of my monthly Internet bill, and be able to cover the cost of buying a new computer every two or three years. Setting my freelance rates is more about trying to figure out what my time is worth, and determining what “worth” is doing.
For those with tangible products to sell, though, setting prices offers a little more clarity -- at least when it comes to covering your costs. Some of the considerations that go into setting your prices to cover your costs include:
• Materials or products: If you are making something, you need to consider the cost of the materials. If you are re-selling, you need to base your pricing on how much it cost you purchase the items. You can save money by drop-shipping or by looking for vendors at wholesale trade shows.
• Labor costs: If you hire someone to work for you, it's important to consider those costs. This includes pay (and payroll taxes) and benefits, as well as insurance and other costs that come with labor.
• Overhead costs: A business run out of your home office has lower overhead costs than a business run out of some other location. You will need to price your products or services higher if you need to cover the cost of renting or buying office space, as well as all the utilities involved.
There might be other costs involved with getting your products or services to the market, and you will need to make sure that your costs are covered if you expect to make a profit. The more you can cut your costs, the better off you'll be -- especially if the market won't bear higher prices.
Even with this basic information as a starting point, though, you still need to be aware of the realities associated with doing business in the 21st century. "There is a need to stay both competitive and profitable amidst a rapidly changing marketplace," says Wiser's Shpanya. "You need to be able to price items optimally according to conversion rates, competitors, and traffic to SKU, price elasticity, demand curves, and more."