Pricing Strategies

Part of your market research involves pricing your products or services and the different methods that you can use to accomplish this. If you offer a product, it's relatively straightforward: you estimate what it will cost to produce or purchase the product, add in a share of your overall expenses, plus a reasonable profit margin. You will be limited, however, to the price that the market will bear — which is what customers are willing to pay for the product. You also need to factor in the effect that reducing or increasing the price will have on sales: you might find, for example, that reducing the price slightly will result in enough additional sales that you're actually making more profit than you were when the price was higher.

In terms of market research, you need to know what your competitors are charging for similar or comparable products or services. This may be as easy as checking their Web sites, reviewing their catalogs, visiting their stores, or phoning and asking for a quote. You should be respectful of their time and privacy, however, and never cross the line into what might be considered corporate espionage. Just remember how you'd feel if someone invaded your business privacy in that way.

Beware of setting your prices too high or too low. If prices are too high, they'll reduce your customers' ability or desire to purchase the product or service. If your prices are too low, people will assume that the quality is also low — this is especially true when it comes to services. Don't undervalue yourself just because you're starting out.

Pricing a service is slightly more complicated, and, in many cases, depends largely on what other businesses are charging for similar services or what typical labor charges are in your industry. You could base your price on a flat fee (e.g., a three-page resume would cost $300 to write and edit), or you could base it on an hourly or daily rate. Keep in mind, though, that you can lose money on a flat-fee project if the job turns out to take a lot longer than you expected and you don't have a contingency factor built into your contract.

To figure out where to set your rates, think about the annual income you want to earn and work backwards. How many hours a week will you be working and how many of those will be income-earning time (as opposed to marketing and administration, for example)? How much time off will you need? Work out how many hours a year you'll actually work, and then divide that into your income goal.

Say you want to earn $60,000 a year before taxes and other expenses, and you're willing to work forty hours a week, thirty of which you think will be productive (earning) time. You factor in two weeks of sick days and three weeks of vacation. That means that you'll need to charge $42.55 per hour.

Forecasting Costs

Since costs are a major part of determining pricing strategies, it helps to know what kinds of costs (expenses) you're looking at. These include direct and indirect costs.

Direct costs are often referred to as your “cost of goods sold.” These are the costs that went directly into the product or service that you're providing. If you have a landscaping business, your direct costs might include materials such as rocks, bricks, or sod that you purchased for a specific job. If you're producing wooden planters, the wood pieces, screws, and paint that went into each planter would be the cost of goods sold.

You'll often hear indirect costs called “overhead.” These include the expenses that aren't related to a specific job or product, but are nonetheless necessary to keep the business running. This is everything from vehicle maintenance for your landscaping truck to advertising for the finished wooden planters. Businesspeople often underestimate indirect costs, so think about everything that you'll have to pay out of your business earnings, from office expenses to marketing to health plan costs.

You can research the costs involved in your business, whether direct or indirect, by checking the prices of supplies through stores, wholesalers, or catalogs and by checking through your own records (to find out, for example, how much you spent on vehicle maintenance last year).

Forecasting Sales

As part of your pricing strategy, you'll also need to research what expectations might be reasonable in terms of weekly, monthly, or annual sales. You can base this on talking to potential customers, suppliers, or local business experts, or by looking for industry statistics: the U.S. Department of Labor, U.S. Department of Commerce, Industry Canada, and local economic development offices may be able to help.

Trade or professional associations often conduct surveys of their members to produce a snapshot of annual earnings; these are usually broken down by an identifying factor such as company size. Local, regional, and national business magazines also run annual surveys of the most profitable or successful companies, while trade magazines and newspaper business sections are also good sources of information.

  1. Home
  2. Home Business
  3. Researching the Market
  4. Pricing Strategies
Visit other About.com sites: