If there is one question that can keep you up more than any other as an entrepreneur, it is probably the question about how you value what you do or sell. How do you set effective prices?
Trouble can easily be created when you set your prices too high or too low. It can be very challenging to know exactly where you should be pricing—it’s not an exact science—but there still is some science that can help you. Pricing can be especially difficult if you are just starting out in your business or if you are rolling out something new. How do you know whether it’s the right price and if it is going to work for your audience?
There are three key factors to focus on when setting prices:
- Your target customer
- How much your competitors are charging
- Understanding the relationship between quality and price
It can be a very common mistake, especially in the beginning of your business, to underprice everyone else. It is a common misconception that if you are the least expensive, you will get more volume, purchases, or sign ups. This is simply not always the case. If you have less of a reputation than the competition you are undercutting, you risk being perceived by potential customers simply as cheap. You will see that most people are unwilling to purchase from someone who they believe has less value.
As a dear friend of mine always says, be wary of the bottom feeders or the ones who are just looking for the cheapest price. That person will never be loyal to you, they will always move to the lowest price.
Who is your ideal client?
No matter what you are creating, if you take the time to figure out who your ideal client is, that information will serve you well in the long term. Are they an avid shopper? Coupon collector? Are they more price or value sensitive? Customers need to believe that they are getting the best value for their money. It’s hard to drive value when someone cannot come in and touch something physically, so you have to focus on creating your customer experience.
What are your costs?
Something that absolutely everyone should do, but gets skipped all too often is knowing your costs. What costs do you have do you have to run your business, develop your products or services? Hard costs and soft costs should both be factored into your overall price model. Do you have costs for labor, marketing and selling or operating expenses? Literally, keeping the lights on, using your cell phone for your business, mileage on your car and your personal fixed assets. These are all things that are depreciating in value and being used due to you owning your business.
How much do you need/want to make?
It is also a critical step to define what your revenue target is for the year. From there, you can determine how many of each product or service you need to sell to reach that target, which can in turn shed some light on your pricing structure.
What value do you add?
Always remember your individual value that you bring to the table. Do you add extra services, guarantees or bonuses that your competition do not? What do your customers receive for buying from you instead of someone else? Figure out what your audience will pay for what you are selling, and then consider what you can do to distinguish yourself from the rest. Your pricing will fall into place.
Need help figuring out the answers to these questions? Not sure where to start? Contact me today for one-on-one coaching!