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