How to Price What You Sell
Pricing your products or services can be one of the most challenging decisions you make as a small business owner. The risk of pricing things too high is that you won’t sell enough items/services to make the revenue numbers you need to, and the risk of pricing things too low is that you won’t make enough revenue with what you sell. Like Goldilocks, you have to find a way to price things juuuuuust right.
Everyone (experts and novices) seems to have an opinion on how to price what you sell. Some people tend to focus on where the product/service sits in the market place – how much does it cost compared to competitors. They’ll use this benchmark to go higher or lower than the competitors in an attempt to demonstrate a good value (lower than competitors) or a premium product/service (higher than competitors). Others will tell you to keep prices low so you can sell more of your product. Some will tell you to raise prices to get more profit from each of the transactions. Don’t discount, because you’re a luxury brand. Raise prices and then discount to provide a good value proposition. Post prices for people to see. No, keep them to yourself until you make a proposal. Negotiate. Don’t negotiate. And so it goes on.
With so much advice out there, how do you pick what to do?
The biggest problem with most of the advice out there is that they don’t talk about your business. I’ve been to a lot of conferences and read a lot of books where experts talk about pricing unilaterally, which causes lots of problems for you as a small business owner. The photographers all nod their heads in agreement with what the speaker is saying, while the stationers and dress designers are looking on with furrowed brows. But could we expect any other response from a crowd with diverse company offerings?
I see two main challenges with the unilateral discussion approach. The first issue arises with what the business is selling. Some businesses sell products that come with large production costs. Materials are not cheap, labor is required to make or put things together, and the overhead to house the operation is not cheap. Other companies sell services with few production costs, just your time and intellectual or creative abilities. These operations can run out of a house with no labor costs and the overhead is just the spot at your kitchen table where you draft the design for a new party. These are important distinctions when pricing, as we’ll see later.
The second issue is based on the development stage the small business is in. Most small businesses follow a general pattern from conception to maturity, including starting up, just trying to make, breaking even, gaining market share, and (hopefully/finally) succeeding. Pricing in each of the development phases will be different, because the goals are different. Look no further than Uber, which lost $2 billion on $5 billion in sales last year, and is still considered wildly successful (valued at over $60 billion). Their pricing model may lose them money, now, but success in other key areas like consumer base, driver supply and market reliance is setting them up for huge wins in the long game.
So, what’s the answer to the pricing problem? Sorry, but there’s no one-size-fits-all solution to the issue of how to price your products or services. Like most things in business, it’s complicated. Your business is different than others and I can’t offer a silver-bullet solution for you.
I can give you the tools to make the right decision for your company. In the next few blog posts, I’m going to offer a solution with three kinds of small businesses and how to describe them based on specific criteria. For instance, you are either a business that sells based on products, services or contribution. We’ll dig into each of the three types and how best to price for them. We’ll also drill into strategies and tactics for each business type to do pricing. I hope you’ll join me as we explore something crucial to your company’s success.