New business owners often wonder, “What price should I charge for my product?” It’s a good question, and it takes time to answer. Pricing is both an art and a science.
First, understand all of your costs, including things like time. And then, examine the market.
Be Clear About Your True Costs
Most entrepreneurs are highly skilled and passionate about what they do, yet are hesitant – and sometimes downright resistant – to understanding and tracking the true costs of their business. Many are unaware that they are actually operating at a loss. They blame poor cash flow, which they try to finance through credit card debt and small business loans.
Time is one of the most understated costs. The hours spent ordering materials, planning projects, and meeting with customers can add costs and affect the bottom line. While the so-called learning curve of getting up to speed on best practices may take more time at business launch, tasks such as research and development may be ongoing and should be considered.
Examine the Marketplace
A few variables to consider when setting a price are your competitors’ prices, the relative quality of your product or service, the convenience it provides, and customers’ emotional buying habits. If you set the price too high, some customers may turn away, while others may justify the expense because they feel they are getting higher quality. Lowering the price sometimes translates into larger sales volume, but if the price is too low, the business won’t be profitable.
Determine your Breakeven
Once you know your costs and your potential price, determine your breakeven point. Only then can you adjust the price based on expected volume to achieve profitability.
A WESST business consultant shared the story of a startup business that changed course after completing a pricing exercise.
“I worked with two women who wanted to open a salsa dance studio,” said the consultant. “After performing a break-even analysis, we determined they would need to conduct six to seven well-attended classes per day just to cover their costs. This was unrealistic, and they decided to change directions.”
Taking the time to truly understand the pricing model of your business is one of the best investments you can make.
New Mexico’s nonprofit lenders offer training and workshops to help new business owners understand how to price their products and services.
Learn more about WESST, and visit the WESST training schedule. Another nonprofit lender, LiftFund, also offers online training. Learn more about LiftFund, and visit the LiftFund training schedule.