Cost and Pricing of Products or Services
No matter how superior your product or service may be, your business will fail if your customers won’t buy. And, while effective advertising will spread your message and draw customers to your business, the price of your product ultimately has a large impact on whether or not you make the sale. Especially true in tough economic times, your price must keep your business running smoothly while being reasonable for your target audience. Take a look at the ideas below about how to price your small business product.
What Is Price?
Price is the amount that your customers will pay for your good or service. It’s up to you to know what price tag is most suitable for your business offerings. However, there is no one specific formula for calculating a price that is both profitable for your business and reasonable for your customers. In fact, there are many different strategies for determining a suitable price for a product or service, each with its own benefits. But, in order to find out what formula works best for your small business, you need to figure out your production cost.
What Is Cost?
Cost is the total amount of money that you spend in order to produce or provide your product or service. It takes into account fixed expenses, like facility rental, loan repayment, and other stagnant monthly payments required for your business to keep operating. Cost also includes variable expenses, or “out of pocket” costs, which you can control from month to month. Fixed and variable expenses together are sometimes known as “overhead expenses.”
Cost is the starting point of the pricing process because it provides you with a “break even” point, or a number at which to begin calculating price. If you were to use the total amount of your production cost as your product price, you would neither gain nor lose money; you would “break even.” But the goal of your business is to earn a profit, so it is essential to make sure that the end price of your product or service produces enough profit to cover all your costs and leave you with more money than you started with. Once you’ve determined your cost of business, you can consider implementing a pricing method to find a price that works for you.
What Are Examples of Pricing Strategies?
- Cost-Plus Pricing. This method involves calculating a targeted profit amount and adding that amount to the base of production costs.
- Competitive Pricing. This strategy involves researching your competition’s prices for similar products and adjusting your prices accordingly.
These are two of the more common cost-based pricing methods, but they are not the only ones available. Other methods include value-based pricing strategies, which focus on the needs of your customers instead of the projected profit of your business. Determining which method is right for you can be difficult, so consult business advisors, industry publications, or up-to-date online resources for more information about smart pricing for your industry.
