Direct costs are those which are immediately associated with doing business. These costs get directly assigned to your products and services you provide. [2] X Research source Labor costs Marketing costs Manufacturing costs (cost of raw materials, equipment, etc. ) Indirect costs are things associated with keeping things running, and the day to day. These are sometimes thought of as the hidden or even “true cost” of running a business. [3] X Research source Operating expenses (including rent on your building, utilities, etc. ) Debt service costs Return on any investment capital Cleaning and office supplies Your own salary
Labor costs Marketing costs Manufacturing costs (cost of raw materials, equipment, etc. )
Operating expenses (including rent on your building, utilities, etc. ) Debt service costs Return on any investment capital Cleaning and office supplies Your own salary
Once you know how much money you need to make for the business to be successful, then you can start getting some sense of what a successful price would be for your product. It may take some number of years to master your market.
Provide genuine customer service, not just lip service. [5] X Research source
For instance, if you’ll have $60,000 of operating and manufacturing costs per year and want to bring in $40,000 of revenue, your success point is $100,000. If you think you can sell 6,000 units, that means your price per product should be at least $100,000/6,000 which is $16. 67 per unit.
Say you’re one of two frozen yogurt stands in your town, and you can’t figure out why your $7 a cup (cheap for the ingredients!) organic coconut rosemary kefir isn’t bringing in the masses, while the “Dairy Queen” across town sells regular chocolate cones like they’re going out of style. You need to be familiar with their prices and their customer base so you can stay competitive and stay relevant. Do you share the same customer base? Is there another customer base you might tap into and market to, to make your business more viable? Is anyone ever going to be willing to pay your prices? These are important questions for a successful business to consider when pricing. Use a search engine to research your competition. Social media and the internet have changed the ways customers find business. [7] X Research source
Underpricing is often done by companies who want to sell a higher volume, expecting that the customer will assume they’re getting a deal, especially in a down economy. [8] X Research source Doing this, however, can give the impression that the product is “cheap,” not that they’re getting their money’s worth. Overpricing may drive your customers elsewhere. Especially when you’re trying to get your feet on the ground as your business gets started, it can be tempting to set the price too high. The investment of starting a business can be scary and you’ll probably want to start covering costs right away, but consider the customer’s point of view. Setting it at a point you’ll make money will only work if people are willing to pay for it. [9] X Research source
Talk to your customers and listen to their feedback. Take it to heart. If they enjoy your product but complain about the price, you might consider making a change. Develop a budget plan. Try to focus on a long term strategy that will result in making the business profitable. This might not involve making drastic changes right away, but slowly moving toward an overall goal of profitability.
Sudden increases will look like desperate moves made by a struggling business, which may or may not be true. You want to avoid the impression that you’re raising the prices because you need to make more money. Rather, you need to make it seem as if you’re raising prices because the product is just that good. [10] X Research source Watch your sales volume immediately after making the change. If the move was too sudden, you’ll see a negative change, suggesting that you need to do more to sell the new variation on the product and justify its price.
Use discount tactics and promotions rather than lowering the price all at once. You can even alter the amount that someone gets for the same price. For example, November is a month of diabetes awareness. [11] X Research source During November, you may charge more for sugary drinks and to recoup the cost of charging less on healthy foods. Make sure to the customers about this, as it can help to drive their choices, as well as make them feel better about paying more for something. They will also know that the price changes are limited. Avoid seeming desperate. For example, an empty restaurant may give the impression that the food is not delicious. Especially if it suddenly becomes very cheap, people may feel the product is of inferior quality.
Use a Buy One, Get One Free promotion to get people interested in your product and ensure that they’ll be struck by the deals they’re getting. If you can keep them coming back, even when you’re not holding promotions, they’ll be hooked. Often sellers will bundle several products in the same package, moving old or unwanted stock by creating killer deals. Dated DVDs, CDs, and video games are often sold using the bundle approach. Quantity discounts (20% off $150 or more!) and rebates ($399. 95 after rebate!) can also help to get people to purchase more. [12] X Research source
Consider creating a “Premium” package to up-sell customers on moderately “improved” versions of the basically the same product, but with more sophistication (i. e. , more marketing). Consider establishing a “line” of products, with varying levels at which the customer can engage. Car washes will often use this pricing strategy: A basic wash could be $2, wash and wax $4, and the whole package $6.
Historically, promotions have proven to be a better driver than advertising. [14] X Trustworthy Source Harvard Business Review Online and print journal covering topics related to business management practices Go to source One drawback to promotions is that they tend to be followed by lower levels of purchasing of that same product or service directly following the promotion. [15] X Trustworthy Source Harvard Business Review Online and print journal covering topics related to business management practices Go to source
Captive Product Pricing is used when products have complements. Companies will charge a premium price where the consumer is captured. For example, a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor. In some places or under certain circumstances, price gouging is unlawful. [16] X Research source [17] X Research source
