How To Price Your Products and Services

by Summer Alexander on December 14,2012

How to price products and servicesDetermining how to price your products and services is by far the number one concern I see when working with my clients. Perhaps concern is putting it too lightly. Many entrepreneurs go into panic mode which many times leads to under-pricing their products and services which later turns into resentment.

So how does one go about properly pricing their products and services? 

Well there are 6 factors to consider and having a complete understanding of each will help you to eliminate any questions surrounding your pricing.

#1 – Economics of One Unit

Simply put you need to know what it costs you to produce one unit of (insert your product name here). If you sell cupcakes you should have a full understanding of what it costs you to make one cupcake.

How much do you pay for flour, sugar, eggs, milk, chocolate, sprinkles, cupcake packaging, etc.?

How much does that yield? Let’s say 1 package of flour and sugar, 1 carton of eggs, 1 gallon of milk etc. will allow you to make 100 cupcakes.

Take the cost (for example $20) and divide it by the number it yields (100) to get your cost per unit ($0.20)

So if it costs you 20 cents to make one cupcake this is the base number in which you use to determine pricing.

#2 – Associated Costs

So it’s not as cut and dry as producing a cupcake for $0.20 and selling it for $1.00 to make $0.80 profit per cupcake. You also need to know what your associated costs are such as renting the commercial kitchen, advertising, employee wages, marketing, your salary etc. and use those numbers to determine how many cupcakes you need to sell each month to cover expenses (and make a profit).

#3 – Competitor Pricing

Don’t get freaked out by this. Yes, you want to have at the bare minimum, an idea of what your competitors are charging  BUT it doesn’t mean you have to compete on price or Heaven forbid (gasp) charge lower than your competitors.

In fact in the work I do with my clients I never suggest they compete on price. Instead conduct research on your competition to determine where you stand out and what makes you different.

Perhaps you have a streamlined process or you use organic ingredients or you offer delivery or you have an online ordering system. Whatever it is, find the areas in which you exceed the competition and use it to justify why you charge more.

Download the Free Business Plan Toolkit which includes a worksheet to help you with researching the competition.

#4 – Quality of the Goods

Having a high-quality product or service goes without saying. Even if you justify charging more for your products or services if the quality is no good you will be inundated with returns, complaints, and the worst of the worst – negative reviews on social media.

If you are not sure if the quality is any good the one sure fire way to determine this is to sell something and ask for feedback. This does not, I repeat, this does not mean to sell something to your Mom or other loved one who is

1. Not your target market and

2. Too attached to you personally to give you constructive feedback.

#5 – Benefits to the Consumer

The benefits a consumer can expect to receive as a result of purchasing from your company must be clear and measurable. Having a good understanding of what your customers pain points are and how your products or services are the perfect solution can go a very long way in helping you to price your goods.

Take my company for example, when is the last time you woke up in a cold-sweat thinking “OMG! I need some market research like now!!” I’m guessing not ever.

You see I understand that my clients are not looking for market research, they want validation that they have a good idea for a business and that before they invest countless dollars and hours to bringing the business to the marketplace they really do have a chance at being successful.

So the market research data I provide gives them peace of mind. And really what price can you put on that?

#6 – Confidence

Confidence could almost be the only factor listed because this is where I see entrepreneurs struggle the most. You doubt yourself, you doubt your abilities, you doubt whether or not what your selling is good enough, etc.

With all of that doubt piled up you then start reducing your fees until you find yourself almost giving away your products or services for free. Now you aren’t making enough to cover your expenses and you are starting to resent your business and not long after that you close up shop and head back to (cringe, gasp, shout, cry) a j-o-b.

So tell me are you struggling with pricing? Post a comment below to let me know where you need help and I will personally respond.

If you don’t have the time, patience or know how to figure it out contact me and I will be happy to work with you.

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  • http://www.bizsugar.com Heather Stone

    Hi Summer,
    Thanks for the great overview of something that should definitely be considered by more entrepreneurs. While I think many people do take into account how their prices compare to competitors, too few think about the costs of providing their products or services…and maybe the actual value to customers. These are very important things to consider when trying to figure out whether you’ve got a viable business model. Thanks for sharing your post with the BizSugar community!

  • Summer Alexander

    Thank you Heather! I appreciate you stopping by. Pricing products and services is one of those tricky steps in business planning where I find many business owners guess, compare or pluck a number out the sky.

    Hopefully this post will provide some beginning steps to help those entrepreneurs who are struggling in this area make some progress in the right direction.

    Happy to have found BizSugar!

  • http://www.smallbizviewpoints.com Harry

    Summer – Excellent article that explains the topic that confounds so many entrepreneurs and seasoned businessmen. I like the fact that you are advising to consider both the cost of the product / service as well as value to customer.

    Pricing is both an art as well as science. As you mentioned in the article there are several angles you need to consider when arriving at price of the product. The price customer is willing to pay is how he perceives the benefits of the product to him. I had written an article titled 10 commandments of pricing where I talked about this and other points to consider for pricing. Would love to hear your view on the commandments. Here is the article – http://www.smallbizviewpoints.com/2012/04/04/ten-commandments-of-pricing/

    • Summer Alexander

      Hi Harry,

      Thank you for your comment. I love your statement “Pricing is both an art as well as science.” This is very true and setting fees may involve some tweaking and adjusting along the way. I’ve found once the confidence is there, all the other steps seem to work themselves out.

      I look forward to reading your article.

  • http://www.MarketingOutfield.com Dave Hubbard

    Nice article, Summer. Additionally, if your competitive advantage (e.g. “organic cupcakes”) justifies a higher price than your competition, don’t just change the price tag on your cupcakes. Proactively and prominently promote your value proposition and competitive advantage to increase sales. “We only use organic ingredients in our cupcakes. Organic ingredients often taste fresher because they don’t contain preservatives. Organic ingredients do not contain synthetic fertilizers, fungicides and insecticides . Wouldn’t you rather give your family one of our organic cupcakes?”

    • Summer Alexander

      Thank you Dave, excellent point. It’s not enough for you (the business owner) to know you have a better quality product or a more streamlined process. It’s essential that your buyers understand this as well.

  • http://www.kimaverycoaching.com Kim Avery

    Hi Summer – This is a great list of things to consider. Pricing is a HUGE concern for entrepreneurs and service professionals.

  • Summer Alexander

    Thanks Kim! You are absolutely right it is a big concern, hopefully these steps will help to take some of the mystery away from how to go about establishing pricing.

  • http://www.cherylcope.com Cheryl Cope

    Very simple and east to understand. Thank you.

  • http://Thegreatestleaders.com Debi

    I totally agree with point #3-you must believe that you have an awesome product or one that will benefit your customers over the competition. I believe you don’t have to ‘sell’ your product if you truly believe it in and that it is special-it will sell itself. Great article.!

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