How to Set and Get the Right Price

Pricing Strategy
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Which feature of your product does every buyer ask about? Which sales tool is your best closing device? Which feature immediately differentiates you from your competitors? You guessed it, your price.

Yet, I'm always a bit surprised at how little time businesses spend on their pricing. Since this is a key marketing variable for any small business owner, here are some thoughts on the setting (and getting) the right prices.

Price is a Promise

Let's say you are grocery shopping, and you come across two brands of cereal. One is a well-known brand of flakes that comes packaged in a 20 oz. box contains a toy and is priced at $4.99. The other is a store brand of flakes, packaged in a non-resealable plastic bag and sells for $2.99. Which one would you buy?

If you based your purchase decision on price alone, you’d pick the 28 oz. bag for $2.99 and be on your way. But there’s more to price than just that, isn’t there? There are the promises involved. In this example, the $4.99 brand promises you the highest quality ingredients and taste, an extra toy that could occupy your kid while you watch reruns of The Dick Van Dyke Show, plus the convenience of a resealable package.

Although this example deals with cereal, similar decisions are made by buyers in your market. Each time a buyer chooses a product, they match up a price with its promises. So, as the marketer of a small business, it is your job to understand what are the price and promises for your service.

Determine Your Promises

As you set your prices (or consider raising them), take stock of all the value factors that go into your price. What attributes of your product or service are noteworthy? Below are some examples of value factors that go into a product’s or a service’s price:

For a product:

  • Quality of the raw materials
  • Finished product performance
  • Packaging
  • On-time delivery
  • After-sale service

For a service:

  • Experience level of the service provider
  • Bottom-line impact of the final deliverable
  • Appearance of the service provider
  • Turnaround time for phone calls/emails
  • Ability to meet deadlines

As you can imagine, your ability to deliver various factors, over and above your competitors, directly impacts the prices you set…and get. If you promise certain factors, yet fall short of delivering them, your price will be challenged through customer complaints, delayed payments or customer defections.

Use a Variety of Ways to Arrive at Your Price

One big mistake I see small business owners make is using only one method to calculate their prices. But, what if your calculations are wrong? Then, you are stuck with a bad price. Instead, I suggest that businesses use several different pricing methods to calculate their prices.

Method No. 1 -Costing Out a Price

This first method takes into account your costs, your desired profit, and then totals these into a price. To find your business’s total costs, you have to account for two types; direct costs and indirect costs. Direct costs are those you incur when delivering your service and typically include labor and materials.

For example, if you owned a t-shirt store, your direct costs might include the labor to staff the store, the blank t-shirts you buy from a vendor, the decals you apply to the shirts and all the equipment you use to apply the decals to the shirts.

Indirect costs are all the other costs not accounted for in your direct costs and include things like rent, insurance, phone and utility bills and office supplies. These indirect costs cover everything you need to keep your business operating every day, whether you make any sales.

After you’ve uncovered what all your direct and indirect costs are, add them up. Just for fun, let’s say these total $10,000 annually. Now, let’s say you estimate you can sell 2,000 t-shirts in a year. Dividing your $10,000 in expenses by the 2,000 quantity, you end up with a breakeven of $5.00/t-shirt. This breakeven price is the lowest price you can charge and still cover all your costs.

The next step is to ask yourself what profit you want. Let’s say you’d like to have $20,000 to live on during the year (not a princely sum, but I am just trying to keep this simple). This is your profit. OK, now take that $20,000 and divide it by the 2,000 t-shirts you expect to sell, and you come up with $10/t-shirt. Add this to your $5/t-shirt cost and the price you should charge is $15/t-shirt.

Method No. 2 - Pricing Competitively

After you’ve established your cost-based price, you want to compare this price against market prices. The prices your competitors are already getting and are a key determinant of your own pricing.

Finding competitive information isn’t all that hard; it just takes a little digging. If I were an owner of a t-shirt store like in the example above, I would visit 5 other t-shirt shops and inquire about their pricing. Then I’d ask myself do they offer the same quality t-shirts to me?

If their prices are higher, what else are they offering to justify the price? If their prices are lower, is their product quality (or service) noticeably lower? This kind of competitive surveillance is crucial when determining your prices.

Now, what if you are in a business-to-business market, or selling a service? Here are some common sources of information for competitive prices:

  • Your preferred customers who can supply you with price sheets from competitors.
  • Trade associations who might check pricing among the trade.
  • Job candidates interviewing with your company—who come from competitors.

Method No. 3 - Pricing by Position

Now, set your calculator aside and ask yourself this question “How do I want to be perceived in my market?” This is an important question because your price positions your service (or product) in your prospects’ minds. What do I mean by this? OK, think Ferrari. Now, think Ford. Totally different price points, totally different perceptions, right?

If you want your service to be positioned as higher-end (think Ferrari), you will choose a price point towards the higher end of the price ranges already found in your market. If on the other hand, your service will be more workmanlike, sacrificing additional features and the finer touches, you’ll price lower. In my book The Marketing Toolkit for Growing Businesses, I identify at least 13 different price strategies you could choose. But to make this easier, I’ve boiled your choices down to just three:

  • Premium Price (most expensive 1/3rd of your market)
  • Middle Market Price (mid-level 1/3rd of your market)
  • Budget Price (least expensive 1/3rd of your market)