Know Your Competition

The Ins and Outs of Pricing for Profit

Set prices too high and customers may disappear; set prices too low and customers may bang your door down, but will your business be able to meet the demand? How do you go about pricing your company's goods and services in a way that benefits you and the customer?
First, you've got to know your competition. You can often find out how your competition is pricing their products or services by visiting their premises or their websites. Other resources for researching prices include industry publications, online discussion boards, trade associations, or networking groups. You may also try contacting business owners in your industry who are not direct competitors to ask them how they establish their pricing structure.

Setting the Selling Price
If you discover that prices for comparable products and services are similar in your market, arriving at a competitive price range for your own offerings may be relatively easy. However, if prices vary considerably, try to find out why. For example, a company that charges considerably more for its products may have a reputation for superior quality, a particularly attractive location, additional services, or extensive advertising. In other cases, you may find that a high-priced competitor offers no additional value to customers but has been successful in marketing its product to a willing and able clientele.

Ceiling Price vs. Base Price

One way to determine the ceiling price, or the highest price the market will bear, is to survey customers. What type of businesses and kinds of people comprise your prospective market? What are they willing to pay for particular goods and services? You may discover that the prices customers are willing to pay are, in fact, higher than current market rates.
The next step is to establish your base price, or the minimum price you must charge in order to break even. What are your outlays for supplies and materials? What are your fixed overhead costs for your building, equipment, and utilities? What is the cost of servicing loans? How much interest would otherwise accrue on investments made in the business? What are the product development costs? How much will the business spend on marketing? What financial cushion do you need to keep the business running? What are your payroll costs? When considering how much to charge, do not forget to factor in compensation for your time, labor, and personal investment in the business.
If this analysis reveals that your business is unable to price its products or services competitively while still turning a profit, try to figure out why. Are there inefficiencies in your business that could be remedied? Is it possible to lower your costs—and, consequently, your base price—through economies of scale, a change in suppliers, or outsourcing?
Once you have determined the base price, you can set the selling price. This should be substantially higher than your breakeven price; if it is not, your business and your personal wealth cannot grow.
Sometimes it is necessary to raise prices because costs have increased. You can cushion the blow of a price increase by offering new or enhanced products or services. Many businesses offer discounts to clients who buy frequently or in bulk. If your business sells multiple products or services, consider bundling them and charging a set price for the package.
Once set, reassess your prices regularly. As the marketplace changes, your prices may need to change accordingly. Small, incremental price increases are likely to be tolerated by your customers. If extreme costcutting by competitors threatens your business, try to weather the storm by maintaining realistic prices, while offering customers consistently superior quality and service.

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