How to hit the sweet spot with product pricing
Setting a price for your product or service is one of the most important business decisions you have to make
Any entrepreneur who has a new product or service can’t wait to get it out into the market. But don’t be in a hurry – you first have to ensure that your pricing is right.
Dr Amanda Hamilton-Attwell, Founder and Executive Director of research organisation, Business DNA has some good advice for business owners.
Q: Is pricing for products and services very different?
A: It is easier to cost a product because you calculate the cost of the components. A service would be influenced by subjective factors such as the value you will add to the client with the service you are rendering.
"If you are too expensive, or too cheap, you will lose clients"
Q: Should a service business price by the hour or per job?
A: If you cost only per hour you will never be sustainable. Having said that, you start by costing a project by the hour and then you consider factors such as what value the product or service will add to a company, the size of the organisation and competition in the market.
Q: What expenses should a business owner factor in when determining costs?
A: One of the biggest pitfalls is not accounting for hidden costs. For example, if you have to make many new business presentations to clients, items such as printing, chart paper, board markers and notepads can drain your profits.
Don’t underestimate your costs – utilities, office equipment or even things like credit card fees are also hidden costs.
Q: Should a business owner come in high or low in comparison with competitors?
A: Find out what the industry rates are for a similar product or service. If you are too expensive, or too cheap, you will lose clients. If you are selling a product, investigate at what price your competitors are setting theirs.
If you sell a service, find out what companies charge per day or per hour. If you are tendering for contracts, you may ask at what price competitors offered it.
"Yes, you are an SME and it is tempting if you need the business, but don’t discount what you have to offer"
Q: Should an entrepreneur lower their price to make their business look more appealing?
A: Yes, but only to a point. Remember, you need to make money from what you are doing. If you are discounting your service so much that it will actually cost you more to render it, rather don’t. In some situations you could find a less expensive supplier, but this can be risky. A cheaper supplier might not offer the same quality, and this could drive customers away and impact on the reputation of your business.
Q: What is your top pricing advice for entrepreneurs?
A: Your main goal is to develop and deliver a product or service that is so superior that pricing isn’t a determining factor for customers. This is something that SMEs should strive towards. However, until you get there make sure that you sell at the right price, but also to an appropriate market segment. It doesn’t help to have the perfect pricing model, but are selling to the wrong market.
Q: What is a major snag that entrepreneurs face when deciding on pricing?
A: Be cautious when a client asks for a discounted rate because they say they will support your business in the future if you do this. Yes, you are an SME and it is tempting if you need the business, but don’t discount what you have to offer. Tell the potential client in a friendly way that you are also building long term relationships with clients and that your discount on the second and third order is really attractive.