For any entrepreneur, setting the price for a product or service is a crucial step in building a successful business. Pricing impacts sales, profitability and overall brand perception. It can even influence your business model. To ensure you make informed pricing decisions, there are several key factors to consider.
Production Costs
This includes the cost of materials, labor and any other expenses related to the production of the product or the provision of the service. You should make sure you factor in all of these costs when setting your price, so you don't run out of money. Remember to include labour costs and paying yourself! Even if you abstain from paying yourself at the start, long term you must have this factored into your price if you ever want to have a chance of paying yourself or someone else.
Market Demand
It is important to understand what similar products or services are being sold in the market, as this will give you an idea of the price consumers are willing to pay. If demand for your product or service is high, you can charge a higher price. When demand is low, you need to be more competitive on price.
How you price your product or charge your customer can also be a point of difference. For example, Uber’s quoting and payment system is more desirable than a traditional taxi service.
Brand Perception
Your brand perception can also influence the price you set. For example, if your brand is perceived as premium, you can charge more for your product or service. On the other hand, if your brand is considered budget, you should price your offerings accordingly. Want proof? Checkout how Tiffany’s priced their paperclips (…and that’s in USD).
Profit Margins
Ultimately, your offer should break even and leave a profit margin. Determine your desired profit margin and factor it into your pricing strategy. Keep in mind that it's often easier to increase prices incrementally as your brand establishes itself than to try to drastically increase prices all at once. It’s also easier to reduce your price than it is to increase it. It is important to remember that pricing is an ongoing process, and you need to constantly evaluate and adjust prices based on changing market conditions, costs and business goals.
Setting a price for a product or service is a fundamental step in building a successful business. Be sure to factor in the above and also consider how pricing might entirely change your business model.
If you’re keen on support on things like pricing and other challenges, then get in touch for a free startup check-in. We’re here to help.