Getting the price right is the biggest lesson you will learn in your start-up!
May 21, 2014
Many of us know the game show "the price is right". For those that don't the key is for contestants to guess what they believe the price of a prize is if they were to buy it retail. While the game show rewards the contestants for coming close in the early rounds when it comes to the final they need to be fairly spot on.
Get the price of product or service is sometimes a daunting and hit miss affair (like some of the contestants on the game show) but there are ways you can minimise your risk.
It doesn't matter if you are building a business around a product or service you need to make sure you get your price right. Go low and you run the risk of losing money while aim high and you might out-price yourself. Take for example a consultant – how do you know that you have the hourly rate right or in the food production business are you sure people will pay a premium for your caviare topped cheese slice?
The only way you really know is by market testing the price point. Take some time to research what others are charging for the same or similar product and service. If you can, use friends and family as a road test. Just remember don’t launch unless you have the price point as close to perfect as you can get it. Get it wrong and you’ll need to be prepared to pull it back as soon as you can.
Wherever possible make sure you come as close to the price the market is prepared to pay as you can.
In doing so understand that while you may think your product or service can attract a premium price or high margin, the market may determine otherwise.
This is where you also need to be practical and ensure before you publish your price that you know the true cost of putting it to market. Factor in your business costs and overheads as well as your own labour costs.
Once you have determined the cost (also known as the cost of sale) you can then set about determining the margin or the profit point. We sometimes refer to this as being mark-up. As a rule your margin should be a minimum of 30%.
The test of the price point will come when you take your market price and assess it against the cost of sale of competing products or services. If they are selling higher than your all inclusive cost then you may decide to move the margin up – although, you could also decide that a lower price could be a good customer acquisition strategy.
If their cost is lower, then you may consider lowering your margin to match.
In doing so never ever convince yourself that by under-pricing your product it will somehow generate business and based on volume you are likely to make a profit.
Remember you never went into business as a charity and be careful that a strategy such as that doesn't have the reverse impact of then setting the customer expectation of that being the market price.
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