The costs of starting your small business are high. Not only will you have to pay for a location and employees, you'll need money for your products or equipment. To counteract all the payments you'll have, you'll need to set price points that are low enough to not drive potential customers away but high enough to turn a profit.
If it's your first time handling pricing, you may find it difficult at first. Many people either overprice or underprice based on the economy and previous beliefs, Inc. claimed. In struggling economies, businesses set their prices too low thinking that will allow them to better compete with others in their industry. However, the least expensive isn't always the most desirable. If the price is too low, consumers may think your product is cheap, which will cause them to turn to stores they believe have higher quality items. The same happens when the costs are too high. People won't pay more than they think the product is worth.
Pricing products may be hard, but by taking the following suggestions into consideration, you'll be able to find a middle ground:
1. Know your audience
You shouldn't just throw your product onto shelves hoping it will sell and cover the costs of manufacturing it. Instead, you should do market research to determine how to go about it, Inc. suggested. Pass out surveys, allow consumers to test items or do demonstrations. You need to find out their thoughts before you waste your money. Determine your users' demographics, how they'll use your product and how much they're willing to pay for it. If you price it too much higher than that or if you market it to the wrong people, you're not going to see much of a return on your investment.
2. Determine your costs
You don't want to price your items too high, but you also can't mark them too low. You're business will be on its way to failing in that case. What you can do is add up all your costs to provide the service or create the product, the U.S. Small Business Administration explained. What do your materials cost? How much do your employees make? How much money goes toward other expenses such as rent and marketing? You'll need to set prices high enough to make a profit after all those payments are taken out of it. If you aren't sure how to go about this, try talking to financial services either at your community bank or at the SBA.
3. Consider the competition
What are others in your industry charging for a similar product or service? How do their items compare to yours? You need to determine where in that chain you want your company to fit. You may not want it to be the cheapest, but the most expensive won't help you either, especially if you're going up against larger corporations. They'll have different purchasing and pricing methods because of their higher revenue that would make it unrealistic to compete with them, according to the SBA. Instead, look at what businesses similar to you are doing and go from there.
4. Be flexible
The economy is going to change, which means so are your consumers' buying habits. You need to keep an eye on the market and adjust accordingly, Inc. recommended. You'll have to consider what people are willing to pay over time, how the economy is doing, what your competitors are charging and how many products you think you can sell. It will all influence what you'll be pricing items as at any given time.
Setting prices can be stressful for a new business. You'll want to appeal to consumers without hurting your financial plan. By keeping an eye on your industry and your cash flow, you'll be able to establish pricing that will accomplish both those goals.