While pricing your product or service is an important consideration, I think it receives way too much emphasis and attention

Yes, you need to price your product/services wisely… after all, you’re in business to earn profits. The problem arises when business owners hyper focus on pricing, instead of value. Below are some general tips on pricing…

However, it’s important that you note the following:

• I am hesitant to recommend universal pricing strategies for all products and services because critical variables differ significantly by industry, geography, personal goals, size, location, and many other reasons. But since you understand your resources, costs, forecasts, and goals better than anyone, you’ll have to fill in the blanks.
• I am not an expert in business (or personal) finance. This website is devoted to helping you become an excellent marketer. So, while it’s appropriate that I cover pricing and financial planning as part of the marketing process it would be irresponsible to delve much further.

Tip: Make sure you consult with an objective financial advisor… one that specializes in small business investment capital, cash flow management, and the like. Many, many small businesses go under due to lack of proper funding. Make sure you have enough money, particularly in the first couple of years, to weather unexpected storms.• Arrive at ballpark pricing by assigning costs by product. You can start with your costs and work up or begin with a proposed price and work back.

Here’s an illustration how of this works: Let’s assume I am (once again) a widget retailer and the following is true …

• The money I receive when I sell one widget is $10.00.
• The costs for labor and materials per widget is $3.00 (cost of goods). I’ll deduct this.
• Therefore, my gross profit is $7.00 per widget (what I have left after paying for labor and materials), or 70%.
• Now, I’ll estimate that my administrative and operational costs (rent, utilities, office supplies, furniture, mgmt. salaries, etc.) come to $.80 per widget, so I’ll deduct that as well.?
• Lastly, I’ll estimate my marketing expenses (signage, advertising, on-hold music, specialty ad items, etc.) to be $1.20 per widget.

That leaves me with a net profit of $5.00 each, or 50%, per widget (before taxes).

How do you assign administrative and marketing costs by product?

Simply divide the total amount you’ve spent in each category over a specific period of time. Then figure out what percentage of your total budget (for the same period of time) they represent. Deduct that percentage amount off your sales price.

For example, let’s say I sold $500,000 worth of products last year. Of that, my $10-widget accounted for 50% of the sales, or $250,000. My total administrative and marketing outlays only were $100,000.

Since my $10-widget was 50% of my business I’ll assign that product the same percentage of costs, or $50,000… $20,000 for administrative expenses and $30,000 on marketing. Based on earning of $250,000 I should deduct $20,000 or 8% for administrative costs, and $30,000 or 12% for marketing expenses – $.80 and $1.20 respectively.

Please do not assume that any of these are standard percentages… they vary widely. If your company is new you’ll obviously have to use your forecast financials.

Perceptual Pricing Categories

A simple way to begin pricing for start-ups, is to put your products, services or company into one of three perceptual categories.

• The first is the “elite” group. These businesses are considered “upper crust” (outstanding services, exceptional products, exquisite environment, and other factors) and their products or services are priced accordingly.
• The second group consists of the A- to B+ companies. Their pricing is competitive with others in their industry… whether that’s ‘steep or cheap’. Most small businesses fit into this category.
• The third-class of companies fit into the “plain-folk-down-home-workingman” pricing strategies group. They are symbolic of the outlet mind-set but once again, this is no reflection on their products’ value or quality.

At first glance these might appear arbitrary and silly, but place your company into one of the three categories. (Remember, while each appeal to different audiences they are equally valid and offer comparable value in the marketplace.)

Next, use the objective product pricing you’ve already established and check to make sure it’s in line with other companies in your group. If so, reduce the selected price by a small amount… $1.00 to $5.00 is usually enough.

This is a simple and brilliant way to ensure that you, your customers and your wallet are thrilled … and you’re not competing on price!

A Story About How To Make An Extra $100,000 Minimum, Per Season, Without Increasing Costs

David and I recently enjoyed a white-water rafting trip in the mountains of Tennessee. It was a wonderfully exciting experience made even more pleasurable by the company’s fun and energetic guides; carefully planned routes and watchful attention to detail.

They even placed photographers, armed with digital cameras, along one of the river’s first category four rapids. They snapped at least eight pictures of each raft (average of 4-5 guests a raft) and had them ready for viewing at the end of the trip. Great idea…

During the quieter moments on our trip we had an opportunity to learn more about our leader, Craig, and his experiences as a river guide. He enthusiastically shared fun stories and patiently answered our endless questions. We were particularly interested in learning that his company guided nearly 48,000 tourists down this river each season.

As we neared the end of our trip Craig reminded us to stop by the camp shop to see our pictures before leaving. Since we had neglected to bring a camera we were pleased to learn that our great adventure was captured and eager to buy a photo or two.

After removing our wet clothing we made a beeline directly to the counter where a computer displayed the digital photos. After providing the necessary information the clerk retrieved our group’s eight pictures. Each one captured our exhilaration clearly and colorfully. We were ready to buy so asked the clerk to clarify the various price and package choices.

Our choices were:

• Each printed photo (8.5” by 11”) for $19.95 each (He suggested we forgo this alternative pointing out that, because of the paper, the picture would fade in a couple months.)
• One photo on a CD for $21.95 or …
• All eight photos on a CD for $49.95. Our opinion? Their prices were way too high for the value… especially when you add Tennessee’s 9.5% sales tax … ouch!

David politely communicated our feelings to the clerk who replied that we didn’t have to buy one, or any, if we thought they were too pricey (after adding that camera equipment is expensive). The result? They lost a sale. Yet, we were intrigued. After discussing our experience; watching others; and performing some quick calculations I approached the shop owner. I introduced myself, related my experience, pointed out that I felt his pricing strategy was significantly hurting his bottom line and asked if I could offer him some free counsel. He graciously agreed. I asked him to verify my assumption that only 10-20% of the guests bought either the photo or one of the CDs. He nodded agreeing. And further, since the photos, the most reasonably priced choice, were printed on poor quality paper (and all were warned!)

The only viable choices were the CDs. This makes his average sale somewhere in the $35 range, $15 higher than the magic “impulse buy” price of $19.95 (a price that 70-80% of consumers are willing to pay “without thinking”). Again, he nodded. I also told him that I felt the best alternative was all eight pictures on one CD. Not only is it a better value, but it would save time since customers wouldn’t have to choose, resulted in long lines. Finally, I recommended that he get out a calculator, pen and piece of paper and do some back-of- the-envelope math.

(Remember, the actual numbers are not as important as the overall impact and there is plenty of fudge room either way.)

Here is a set of assumptions and one scenario: Current Operating Assumptions

• 24,000 (out of 48,000) are potential photo buyers each season.
• 15% (between 10-20%), or 3,600 visitors, currently buy “something”.
• Average transaction amount per customer is $35.
• Currently yearly revenues = $126,000.

Scenario One

• 24,000 (out of 48,000) are potential photo buyers each season.
• 75% (between 70-80%) or 18,000 visitors buy something.
• Average transaction amount per customer is $20.
• Scenario One yearly revenues = $360,000 ($234,000 difference).

Scenario Two

• 24,000 (out of 48,000) are potential photo buyers a season.
• 50% (25% lower than Scenario One) or 12,000 visitors buy something.
• Average transaction amount per customer is $20.
• Scenario Two yearly revenues = $240,000 ($114,000 difference).

As you can see, the results are obvious and significant

There as a good likelihood that this small business owner is leaving at least $100,000 in earnings on the table every season. What’s even more significant, however, is that while his revenues climb exponentially, his costs remain constant and might even decrease!

Here’s why:

• It costs nothing more to load eight photos onto a CD (about 19 cents each) than it does to load one (and is cheaper than the paper and ink for one photo).
• They would receive volume discounts on the increased number of CDs.
• The company had already invested in the camera equipment and was already paying the photographers to take the pictures. These are fixed costs and don’t change… regardless of how many photos they sell!

I don’t know the exact numbers, although I believe my estimates are conservative. Once again, it is less about the numbers and more about creating a well-thought-out pricing strategy… one that is developed based on an understanding of consumer behaviors; fixed vs. variable costs; product/service delivery and the like.