Originally by Elizabeth Paulsen on May 26, 2009, updated 1/22/2020.
I enjoy mentoring new businesses. One of the most common questions I hear from new business owners is “How should I set my price?” This is what I tell them.
Know your competitors’ prices. Gather as much information as possible about your competitors’ prices and why they are charging those prices. Make certain that for each price you know the specific products and services that are included.
Know your lowest possible price. List all your costs for each service/product. Possible costs include supplies, staffing, shipping, overhead, and follow on services. Then, for each service/product, add your minimum margin (the money your business needs to make above the costs for that item to be viable.)
Compare your competitors’ prices to your lowest possible prices. It helps to build a table of each service/product and list your prices in one column and the prices of competitors in other columns. Then, study the options below and select the option that works best for your business.
Lowest Price Option
Consider being the lowest price competitor when:
- You know for certain that you can sustain the price for a long time.
- You know that your competition can’t come near your prices because their overhead and other costs are higher and they don’t have the funding to offer your price or lower.
- You know that another competitor can’t enter the market and offer a lower price.
Don’t aim to be the lowest price competitor when:
- Prospects who are shopping for your services/products may think yours are substandard in quality because prices are associated with quality in your industry.
- There is a competitor who has the funding to drop below your lowest possible price. A competitor who has adequate funding can drop their prices just long enough to get your customers to switch. This will make you raise your price or force you out of business.
It is important to note that customers who shop for the lowest price are fickle. As soon as your price is no longer the lowest, they’ll feel fully justified in moving on. Don’t count on them loving your services/products so much that they will stay loyal to your brand.
Highest Price Option
Consider being the highest price competitor when:
- You have at least one success story that you can share. If you have done the same work for a previous client and can tell a prospect that you significantly contributed to that client’s success, you can command a high price.
- You know that you and your services/products are worth it. Prospects can sense confidence. They’ll believe you’re the best if you believe it.
- There are enough prospects for you to sustain your business.
- You can sustain the level of service and quality that your price promises.
Don’t aim to be the highest price competitor when:
- There are too few prospects to buy your services/products. You could become too dependent on those few.
- You’re not confident that you are better than your competitors and you have no story to tell of past success.
- You don’t yet know how to sustain being the best for a long period of time.
Middle Price Option
Consider being a middle priced competitor when:
- You want the greatest flexibility in pricing.
- You don’t have a great success story to tell right from the beginning.
- You have no desire to make huge waves amongst your competitors right from the start.
Don’t aim to be middle priced option when your business model is really better suited to either lowest or highest price.
Pricing to the Level of Responsibility
There is a practice that I call “pricing to the level of responsibility.” This practice involves charging higher-end prices. This practice is good for a business to implement.
When a business is implementing this practice and is charging a higher price for their product/service, prospects will believe that the business must be the best because it charges a higher price. The logic is that if a business has the courage to charge that much, then there must be a reason, so they deserve the business.
This logic can carry on into a contract. A prospect might believe that because they are paying a company that much money, they might as well use all of its services/products and listen to its representatives. By doing so, they believe they aren’t wasting all the money they’re spending. They are also giving the majority of control to the company, which means that projects can be completed in a timely manner without hiccups caused by overhead.
This practice should never be leveraged simply to secure a high price. The customer would see through that and become offended.
This practice is very helpful in cases in which the customer needs to have a strong commitment to the project. Pricing to the level of responsibility encourages both the customer and the vendor to work together as a team, which will lead to a successful result.
When a business defines its pricing, it can confidently communicate with prospects and customers. Clarity around pricing helps set a positive tone for the business/customer relationship. The earlier a new business can set its pricing, the faster it can become successful.
For more information contact Elizabeth Paulsen at [email protected]