Pricing Your Items

Pricing Your Items

For an entrepreneur one of the toughest jobs may be pricing goods and services.  If one were to investigate the different pricing strategies, you will find a multitude of options.  According to Inc. Magazine, one of the primary considerations to investigate is your potential customer. In this step, it will be important to conduct a market research analysis of some type.  Market analysis can be formal or informal.  Information can be obtained through surveys, cold calls, and/or emails.  While emails and even direct mail may prove to be the most convenient approach, it typically yields only a 3-5 percent return rate.  An alternative to email and direct mail may be to conduct focus groups and individual surveys with individuals who may be potential customers.

After getting to know your customers and how much they would be willing to pay for goods and services, the next step is to determine just how much it cost you to deliver the goods or services.  Above this, you also want to calculate a profit margin and understand how many you need to sell to turn a profit. When considering cost, don’t forget to include overhead factors such as utilities, and rental space. Consider this approach offered by the National Small Business Association.

Step 1:  Determine X.  X is the cost of raw materials, labor, rent, and everything it took to make the product.  In this step, after analysis, you should be able to answer the following question, “What is your break-even mark for this particular product?”

 Step 2:  Determine Y: Y is what you want to make on the goods or service. This number is usually expressed in percentages. 

As you continue to consider pricing, you may also want to set an annual revenue target.  This amount would be your goal for the year.  If you have a service or one type of product it will be easier to set this target.  If you have more than one item or multiple services, the process will be a bit more involved. 

Consider this example:

New Business XYZ has one primary item (item A) in year one.

They have set a revenue target of $10,000 for their first year.

The costs for producing, marketing, and selling item A = $22.50

New Business XYZ estimates that they will sell 5 items per month. 5 items per month, over the period of 12 months = 60 units.

In order to determine a price per product that you want to charge, divide your revenue target by the number of units you expect to sell

$10,000/60 = $166.66

In this example, New Business XYZ will need to sell Item A for at least $166.66.

This is just an example.  If a business has more than one product or line of service, the steps above would need to be repeated for each item or service.

While there are many other considerations to think about when addressing pricing, the last factor I would like to discuss is knowing your competition.  Your potential customers will often shop around before settling with a particular business or company.  You should do the same thing when setting your prices.  See what others are pricing for services or products similar to yours.  Use this knowledge to help determine a price that is competitive while at the same time allows you to make a profit. 

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