Five factors to consider when pricing products or services (2024)

Nothing can cause confusion and doubt in a business like pricing your products and services. While you don’t want to charge less than you are worth, you also don’t want to price yourself out of the market, so how do you know if your price is right?

Whether you are starting out or starting over, here are five factors to consider when pricing your products and services.

1. Costs

First and foremost you need to be financially informed. Before you set your pricing, work out the costs involved with running your business. These include your fixed costs (the expenses that will come in every month regardless of sales) and your direct costs (the expenses you incur by producing and delivering your products and services).

2. Customers

Know what your customers want from your products and services. Are they driven by the cheapest price or by the value they receive? What part does price play in their purchase decision?

Also look at what you are selling, are your current customers buying high-end or low-end products and services? This information will help you determine if your price is right, what level of service or inclusions you should be offering and lastly if you are targeting the right market. It may be that you need to change your market to make your business more profitable.

3. Positioning

Once you understand your customer, you need to look at your positioning. Where do you want to be in the marketplace? Do you want to be the most expensive, luxurious, high-end brand in your industry, the cheapest, beat it by 10% brand or somewhere in the middle? Once you have decided, you will start to get an idea of your ideal pricing.

4. Competitors

This is one of the key times you can give yourself permission to do a little competitor snooping. What are they charging for different products and services? What inclusions and level of service are they offering for those prices? What customers are they attracting with their pricing? And how are they positioned in the marketplace? The answers to these questions will give you an industry benchmark for your pricing.

5. Profit

One of the most important questions business owners neglect to ask themselves is, “How much profit do I want to make?” They tend to look at what others charge and then pull a figure out of the air to be competitive without giving consideration to how much profit the want and need.

While you may be in business for the passion and to add value to the lives of others, you also need to add value to your own. So give careful consideration to what your time is worth.

How do you determine your pricing?

This article was originally published on February 24, 2015.

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