Your Prices Are Great,
Too Bad You're Losing Money!
By: Marilyn McAtee
marilyn@biznetonline.com
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Your Prices Are Great, |
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An old proverb says, "There are two fools in every market. One charges too much, the other not enough". The primary objective in pricing your product or service is not to be foolish to either extreme. So how do you avoid this?
The purpose of this article is not to tell you exactly how to price your products or services but to give you a structure on how to look at your pricing strategy in two steps.
Step one -- How do you start?
First of all, your pricing goals should be an integral part of your business plan. Ask yourself, "What do I want to accomplish with my prices?"
- Increased sales
- Increased market share
- Maximize cash flow and profit
- Deter competition from your market niche
- Lower demand
- Get more people to try your product
- Establish a particular image
- A combination of the above
Whatever the goals, it is important to determine them, write them down and monitor your progress toward achieving them. Too many businesses, especially small ones use a "seat of the pants" procedure to pricing. And that is precisely why the Small Business Administration lists the lack of a pricing strategy as one of the top four reasons that businesses fail.
During the development of your pricing plan, remember that pricing is both a marketing and a financial function. Recently we were working with a doctor that was puzzled why his gross sales were significantly increasing, yet he kept losing money. His pricing strategy was to discount office visits to increase his market share. It worked, but in doing so, we found that he was actually paying his patients to visit his office. He simply did not take into account the financial results of price cutting. That leads to step two -- what should you take into account?
Step two -- What are the considerations?
Number one consideration should be obvious. What are your costs? This brings up how important it is to have a good accounting system. Before you can price effectively, you must thoroughly understand all the costs involved in bringing your product or service to the market place. Not only the direct cost, but all the overhead costs that are involved. In the above example the doctor did not have a good "handle" on what his costs were. On further analysis of his cost structure, we found that he was not considering such things as equipment, liability insurance, loan payments, as so forth. Remember, you have to recover total costs in order to just breakeven. If you do not fully understand cost accounting or what breakeven is, we would recommend taking an accounting course or the get professional help, such as a consultant.
A second important consideration is the customer. In other words, what price will your market bear? How do you find out? Simple, ask them, do a survey. Ask potential customers what they would be willing to pay, what do they think the product or service should cost. The value of your product or service is perceived by your customer. If the price doesn’t meet that perception, then your potential customer may not consider buying from you. Or on the other hand, you may be pricing lower than you need to. Remember, take the time to research, and have a good idea of what an acceptable pricing range is.
The third consideration is what your competitors are charging. Always keep in mind that the buying public likes to shop. Don’t fall into that trap of assuming you are the only choice. That kind of thinking has led to many failures. If your price is higher, do you have added value benefits, superior quality, guarantees or anything else to substantiate the higher price? If your price is lower, make sure you are covering all your cost and making a profit. Know your competitors strategy as well as you know your potential customers.
After you do the appropriate research and you feel you understand your customers and competitors, don’t assume everything will stay status quo. You can be sure there will be changes and you want to be aware of them. So review your customers, your competitors, and your prices on a regular basis.
Final Thoughts
Pricing is a dynamic and important part of managing your business. Few decisions are as important and far reaching throughout your business structure, yet none are as neglected.
Remember, pricing is a marketing and a financial decision. So there must be compatibility. If you lower prices, know what the financial effect will be. If you raise prices, how will it effect your sales.
Price setting is an on-going process. Keep abreast of all the factors, and keep an open mind to new ideas. Rather than being a "fool" due to careless pricing decisions, make you're pricing strategy a foremost consideration in managing your business.
Paul & Marilyn McAtee
"The Small Business Growth Experts"
Authors of Minding Your Own BusinessYou can learn more about pricing and all the other aspects of running a successful business in Minding Your Own Business -- The simplest book ever written on how to start and build your business. www.socalmall.com/sbgawb.htm or email Paul & Marilyn at sbga@earthlink.net