PROFITABLE PRICING. 3 KEY CONSIDERATIONS TO PRICE FOR PROFIT.
Knowing what to charge for your product or service often feels like a daunting decision. We’re here to help you take the guesswork out of pricing!
Consider these three key components to PRICE FOR PROFIT.
1 - Understand Your Market
Do market research to make sense of what your competitors are charging & consider your positioning in the marketplace. This is especially crucial if you operate in a competitive market. That being said, many entrepreneurs launch in market segments where customer perception (of product or service) allows for a fair amount of pricing flexibility. This variability can feel like a gift and a hurdle. To overcome being stuck with indecision at this stage, ask yourself what type of customers you’re aiming to attract - luxury, deal seekers, or quality focused? Then narrow your pricing to target this portion of the market. More often than not, entrepreneurs underprice because of fear and ultimately this ends up directly cutting into their profits. Don’t be afraid to push market boundaries if you’re operating in a niche space.
2 - Know Your Costs
Costs (direct & indirect) are the next critical factor to build into your pricing structure. This means doing a deep dive into what it costs you to provide your product or service.
Direct costs are the expenses your business incurs by producing and delivering products & services.
Direct product costs include research & development, materials & labor (if you manufacture your product) or finished product costs (if you purchase goods to resell), freight & delivery, and product packaging.
Direct service costs are materials required to offer your service & time. So, if you offer a service we highly recommend you use a time tracking tool like TSheets or Toggl to make sense of how many hours it takes you & your team to serve your clients. Very often, when you have a good handle on how you’re spending your time you’ll also see ways to streamline costs through automation and outsourcing.
Indirect costs are your overall business expenses - they come whether or not you make sales.
These include monthly operating expenses like rent, marketing, and staffing costs (not related to production). Make sure to consider annual expenses too, like insurance renewals & subscriptions.
It’s smart to analyze what’s left in your business after you deduct direct & indirect expenses from your sales. This is the key to profitable pricing.
3 - Consider Your Value To Customers
Once you’ve run the numbers and landed on your target pricing structure, we highly recommend testing your pricing. This means that you consider the value you're bringing to customers and then test pricing by actually selling to a beta group. If your product or service is solving a major headache for your customers, you may be surprised that a higher price tag doesn’t sway them from purchasing. You may also get pricing resistance during your test and need to course correct.
You should also focus on messaging at this stage to make sure you're communicating the value of your product or service in a way that matches your target audience & price point. Focus on your customer avatar and use words that will resonate with them specifically.