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When it comes to setting an initial price, you can generally choose from one of three options: You can charge a premium price (this works best if you have a superior, value-added product or service), a lower-than-average discount price (which is generally hard for small companies to sustain), or a price that is in line with your competitors (market price).
To help you decide where to fall on this scale, here are five things to consider before setting a prize:
You may need to vary prices depending on your sales channel. For example, if you sell directly to consumers as well as to retailers/re-sellers, you’ll have to charge the retailers less so they can charge the same retail price you do and still make a profit.
- Markup on cost:
Some companies calculate pricing based on a markup on their cost to produce the product or service. This of course necessitates that you calculate and understand your cost-per-item or service and then decide on an appropriate markup that will cover your overhead as well as results in an acceptable per item profit. By doing some market research you can also find the average markup for your industry.
“Bundling” means to charge lower prices when customers buy more than one product or service. For instance, if you offer website design, Web hosting and e-mail marketing services, you might charge less when customers sign up for all three of your services.
- Target market and perception:
Consider your target market and the perception you want to create of your products and services in setting prices. For example, if your target market are more sophisticated, high income buyers, then you can and should charge a higher price to not only be able to support the costs you incur in providing a higher level of customer service, but also to portray and market your product or service as above average (‘if this costs 20% more than a seemingly comparable product, then it must be better’).
- Promotional pricing:
Many businesses offer sales, coupons or promotional prices to entice new customers or to encourage customers to buy more. This is also helpful when you try to sell seasonal items or are temporarily trying to create buzz for your business, moving inventory more quickly or generating sales in a time that is usually slow for your business.
It’s also important to understand that pricing isn’t a one-time task, but an ongoing effort.
As your new business gets off the ground, you’ll probably have to tinker with your prices until you find the right formula that increases both sales and profits. Keep the above list in mind as you adjust along the way.