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Is your price right?

It's not easy figuring out what to charge, be it products or your expertise that you're selling. But if you're in business for yourself, that's exactly what you must do.

And while everybody has a price, how do you tell if yours is the right one?

Here are some ways to determine whether you're charging what you should -- or could.

Costs determine price
One of the most common pricing methods begins by looking at what it costs to produce your goods and services.

Line up all your expenses, from raw materials to rental space, and add in your mark-up. The resulting figure is your price.

How much should your profit be? That should be based on what you want to earn that year, says small business consultant Ray Silverstein, president of PRO: President's Resource Organization in Chicago.

You'll also need to factor in whether consumers or businesses will actually pay the amount required for you to achieve that income.

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"Let's say I'm selling buttons and I want to make $25,000 a month," says Mark LeBlanc, president of Small Business Success of La Jolla, Calif. "That means I have to charge a dollar a button. Is that realistic and can I sell 25,000 of them in a month at that price?"

What others charge
Another popular way to set a price is by checking out what your local competitors are charging.

"You play detective," says Gene Fairbrother, president of MBA Consulting Inc. in Coppell, Tex. Get price sheets from competitors. Call them up or, if you're squeamish about doing it, have a trusted friend or employee do it for you.

Trade or professional organizations also may be able to help. Many of them do annual salary surveys of their members or do other price analysis on a national or regional basis. If you're a member of the organization, this information should be readily available.

"You've got to be careful about not getting too caught up in national averages," warns small-business consultant Fairbrother. "Let's take a $200,000 house in Rochester, N.Y. That won't be worth the same in Los Angeles, San Francisco or Denver."

According to Fairbrother, "What's most important is to figure out what the market will bear in your immediate area."

Once you've determined a price range -- that computer consultants in your area charge between $45 to $100 an hour -- you need to figure out where your company fits in the range, based on what your firm has to offer and what its expenses are.

Don't shortchange yourself
A common mistake for people setting up shop for the first time is to take the low road. Don't sell yourself or your business short.

"A lot of people first starting out think they need to be the lowest price around," Fairbrother says. "Sometimes that is a mistake because you're building an image that you are not worth what other people are."

In addition, low-balling your pricing could mean you end up increasing your prices in six months and maybe again in a year. "That's a lot worse and more confusing for customers than coming in with a solid rate and sticking to it," Fairbrother says.

That's when gauging your talents and expertise is particularly important. "If you're better, faster, quicker you should get a higher hourly rate than someone who is going to take twice as long and not do as good as job as you," Silverstein says.

A small-business owner also needs to look at the value of the project to the customer.

"How much will they save, what is the benefit of the new product, what is it worth to them?" Silverstein says. "If a client is going to see a $100,000 return on investment than your company wouldn't be out of line charging $25,000 to $40,000."

Re-examine regularly
Regardless of which pricing method your company uses, re-examine your pricing at least once a year. In addition, if market conditions change -- the economy goes south, there's more demand than supply in your industry, or a new competitor enters the scene -- then it's time to go over pricing again.

Don't be afraid to lower prices (or raise them for that matter) if necessary.

"People tend to think that lowering prices is wrong, but sometimes that assumption is not correct. If you really are overpriced, then you should do something about it," LeBlanc says.

A service-sector company should draw up a contract that spells out precisely what services are being offered and for what prices. "A lot of people don't have a written agreement and then all of a sudden a client comes back and says 'Gee, I need this and I need that,'" Fairbrother says.

It's fine to throw in a freebie now and then, but make sure your business can afford it, Fairbrother says. Otherwise, it's best to revisit the negotiation table and demand a higher rate if the contract circumstances changes. In other words, if your company is being asked to take on a lot more work than it should be compensated for it.

And build flexibility into the contract if you're embarking on a project that carries you and your client into new territory. That might mean a cap on costs to protect the client, but also the ability for you to step in and say that the project is ending up taking twice as long to complete and that you need more money. The idea is to set up a framework so that if contingencies pop up, both you and your client will be protected.

Setting prices may not be your favorite part about doing business, but it's a necessary evil. Undercharging or overcharging can kill your business. And it certainly shouldn't be like throwing darts at a board or rolling a pair of dice.

Turn pricing into a science instead of a mystical art, and both your business and your clientele will benefit.

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: April 17, 2002

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See Also
Setting a price to ensure profitability
Pricing for a services-oriented enterprise
Sizing up your business competition
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