Prefer to listen? Click the image to hear this on Soundcloud.
Pricing for Profit Is Part Art, Part Science
While entrepreneurs are excited about opening a business, we are less excited about setting our prices. But knowing how to price for profit is a skill we can't skate past – we've got to figure this out quickly.
Pricing to make a profit takes both strategic thinking and a feel for your market. Part of your pricing decision is pure math. You know what your goods cost to produce if you are selling product, or you know how much it costs for you to deliver your services. If you sell for less than your costs, you will soon go out of business.
The second part of setting your prices is a feel for your market. It is harder to quantify but just as important to your business. Here are the questions to answer:
- What does your prospect perceive as the value of what you offer?
- How does that perceived value match with the value you place on your offer?
Selling Real Estate – A Great Example of How Pricing Works
The best one way to test what you believe the value of your offer to be against how a prospect perceives the offer is to test the market. A great example of testing the market is selling real estate. When a homeowner places her house on the market, typically she has a higher perceived value than a buyer is willing to pay. Part of her price comes from the emotional attachment she has to her home. The prospective buyer doesn’t value emotion, though. The buyer looks at perceived value through a completely different set of eyes. The bottom line to real estate value is that it is set by what a buyer is willing to pay on any particular day, put up against how good the negotiation skills are of the seller (or the seller’s agent). How to price the home for profit is one reason to use a realtor – they do this every day, not just a few times in a lifetime.
Pricing your offers well means that your ego has not inflated what your product or service is worth. It also means that you know your costs and pay attention to how this affects your pricing. You are able to discern a fair price based on input from your prospects (how well they are buying). Your prices become a function of what the market tells you, your experience, and demand (which can change rapidly).
If you are in a situation where you have to educate your market about the value of what you offer (think Squatty Potty), your pricing will be driven in part by how well you can educate and then create demand for your offer. As time goes by, if your educational marketing is good, demand will rise and you can reprice your product or service higher.
Many first-time entrepreneurs don't know how to price for profit. They start out setting their pricing too low, and then find themselves working hard but not being profitable. Their thinking is that if they price “too high“ then no one will buy. This is a lack of confidence in their offer and in their own ability to sell. Setting your pricing too low will haunt you forever, as once you’ve trained your market to artificially low prices it’s difficult to raise your prices. Making this mistake has cost thousands of first time entrepreneurs their business. Sometimes the only cure is to rebrand the business, create a new target market, and relaunch the brand. This often happens when entrepreneurs make a habit of discounting their prices, too.
I’ve helped many business owners figure out how to price their products and services. If you need help with pricing, you can book a quick chat with me to see if I can help (there’s no charge for this brief meeting). Go to https://bookme.name/suepainter and schedule a complimentary business development chat. I’ll look forward to speaking with you and helping you price your offers for profit.