There are a lot of decisions that go into starting a business.
You may find yourself pining over what to name your company, what your branding should look and feel like and of course what your offering will be. But perhaps one of the biggest decisions you’ll have to make is how much you want to charge customers for the goods or services your business provides.
Where do you even start? Here are four helpful ways to jumpstart a pricing conversation and get closer to turning on the “open for business” sign.
1. Research your competitor’s pricing model
To help get an idea of how your packages and pricing should work, begin with an audit of your competitor’s offerings. Matthew White, the CEO of Qebot, a business management platform, suggests starting out by looking at competitors that are like you in size, scope, quality, and scalability.
“Comparing your product pricing to a big-box player may not work as they have scale on their side,” White says. “But maybe you offer something more than they can, such as better service, more customized options, or convenience.”
Create a spreadsheet outlining what your competitors are offering, how much they are charging for their goods or service, what promotions they are running and how frequently they are running them, and what bonuses they offer for first time or repeat customers (such as free shipping or package bundle discounts).
2. Determine what your costs are to make your prices realistic
To ensure that the business you are creating is one that is profitable, it’s important to avoid out of pocket costs from the get-go. Start by taking an overall look at your cost to provide your given product or service.
Renee’ Caputi, a CEO at Enhanced Solutions Advisors, a business consultancy, recommends working backwards to see if you can provide your product or service to the market while still making a healthy profit to sustain your business. By seeing what the market is charging for the products or services you intend to offer, you will be able to figure out your costs and determine whether or not the remaining margin is sufficient to sustain and grow your business,” Caputi says.
When you implement this strategy, Caputi recommends answering the following questions:
- Figure out their customer acquisition costs (How much does it cost me to obtain a customer?)
- Figure out their cost of goods or services provided to the acquired customer (How much does it cost me to provide what the customer bought?)
- Figure out their fixed overhead costs for the business (How much does it cost to keep the doors open and the lights on – even with no sales?)
- Figure out the profit margin (or ROI) you need for a healthy profitable business (How much do I want or need to make for my effort and risk?)
- Add those up and you should have a fair price for your product or service that will keep your business going and your family fed, but you must always go back and then check your pricing against the market and be sure your value provided to your customers supports the price point.
“It works well because if you find you cannot create a sustainable business with the profit margins in place you can either find a way to reduce acquisition costs and/or cost of goods sold, or find a way to add more value to the customer and justify a higher price before you launch unsuccessfully,” Caputi says.
3. Tack on a steady profit margin
One mistake that some business owners make is forgoing a profit margin that ensures their total earnings will make them profitable rather than just breaking even.
Caputi recommends tacking on a profit margin that you feel makes the most sense and checking your total price (cost to provide plus profit margin) against the market to be sure you are providing a value proposition that supports your price point in the market.
How much of a profit margin should you add on? Sean Dudayev, the founder of Frootful Marketing, recommends adding a 40 percent to 60 percent margin, that way you can make sure that you are making your money on top of the product you are offering and service you are providing.
“This works in businesses where you buy from a distributor and then cater the product to the consumers. Or in businesses where there are a lot of upfront costs to build a product ahead of time,” Dudayev says.
4. Talk to potential customers
One of the best ways to make sure that your pricing resonates with your audience is to speak with potential customers and hear their feedback. Would they spend what you’re asking? Are your prices a deterrent or a good deal to them?
White recommends price checking your numbers so you can get a good feel for what their interest would be before you begin marketing your product or services to the masses.
“Get out there and talk to your potential consumer. Pitch them the product/service and flat out ask them what they may be willing to pay,” White says. “If you’re within 10 percent of what they come back with, you’re probably fine. If it’s significantly lower, you’ll need to figure out how to adjust. If higher, you have yourself a great business!”
Check out Bankrate’s small business calculator for more help.