How to Set Prices for Your Small Business
"Pricing is elusive, painful, constantly changing, and based on hundreds of different factors," says Arie Shpanya, the CEO of tech disrupter and dynamic-pricing leader Wiser.
Deciding what to charge, whether you sell a product or a service, is rarely fun, but it is necessary. The idea is to find that sweet spot where you can make a profit, but where you are priced so that your customers are willing to pay.
Covering Your Costs
The first step to setting prices in your small business is to make sure that you can cover your costs. In my case, covering costs is fairly simple. I'm a freelance writer, so I just need to be able to cover the cost of my monthly Internet bill, and be able to cover the cost of buying a new computer every two or three years. Setting my freelance rates is more about trying to figure out what my time is worth, and determining what's "worth" doing.
For those with tangible products to sell, though, setting prices offers a little more clarity -- at least when it comes to covering your costs. Some of the considerations that go into setting your prices to cover your costs include:
Materials or products: If you are making something, you need to consider the cost of the materials. If you are re-selling, you need to base your pricing on how much it cost you purchase the items. You can save money by drop-shipping or by looking for vendors at wholesale trade shows.
Labor costs: If you hire someone to work for you, it's important to consider those costs. This includes pay (and payroll taxes) and benefits, as well as insurance and other costs that come with labor.
Overhead costs: A business run out of your home office has lower overhead costs than a business run out of some other location. You will need to price your products or services higher if you need to cover the cost of renting or buying office space, as well as all the utilities involved.
There might be other costs involved with getting your products or services to the market, and you will need to make sure that your costs are covered if you expect to make a profit. The more you can cut your costs, the better off you'll be -- especially if the market won't bear higher prices.
Even with this basic information as a starting point, though, you still need to be aware of the realities associated with doing business in the 21st century. "There is a need to stay both competitive and profitable amidst a rapidly changing marketplace," says Wiser's Shpanya. "You need to be able to price items optimally according to conversion rates, competitors, traffic to SKU, price elasticity, demand curves, and more."
The Market, and Your Competition
When setting prices for your small business, it helps to understand the market, and to understand your competition. There are plenty of companies that charge higher prices for some of their products are services. This is because they have a narrow target market. If you want to charge more, you need to provide something aimed at a specific segment of the population -- something they are willing to pay for. The wider your target market, the lower your prices need to be to compete.
Understanding your competition is also important. In many cases, you will need to base your pricing on your competition. But you have to clearly understand who your competition is. In the online freelance writing business, there are plenty of writers willing to provide content for $5 to $10 a post. However, these writers are not my competition. I'm not targeting the same clients they are. My clientele has different needs, so my competition is different -- and higher-priced. I can still make a good living, while pricing my services at or a little below my true competitors' prices.
If you have a product or service that you aren't sure how to price, identify your target market, and your true competition. Then you can get an idea of what you should charge.
Make Use of Dynamic Pricing
One of the latest trends in technology is the rise of dynamic pricing. With dynamic pricing, you can arrange to have your prices change based on demand, competition, season, and other factors. This takes some of the guesswork out of setting prices for your small business. Companies like Wiser provide dynamic pricing solutions that can monitor and analyze trends, and then reprice retail products in real time. This means that you can have your prices automatically reset, based on parameters you provide.
While this isn't something that I would likely use for my service-based business, it could be a great feature for someone who sells products, especially online. It's one of the ways that you can learn from Amazon -- a leader in dynamic pricing -- to enhance your own business. However, you don't need to let your business get run out of cybertown by Amazon. There are ways to use dynamic pricing to your advantage, and thrive, even in a world where mega-retailers like Amazon and Walmart exist online.
"Advanced tools such as machine learning algorithms maximize sales while maintaining margins," says Shpanya. "Wiser, for example, partners with merchandisers, marketers, and buyers alike by providing them with the necessary tools to build and sustain real business value."
The best dynamic pricing providers will allow you to set a floor with your pricing. That way, you can make sure that you regularly cover your costs when it comes to pricing. Other than that, your dynamic pricing solution can take care of everything on its own, allowing you to focus on other aspects of your business.
Setting prices for your small business is rarely easy. However, with a little research, and with help from emerging technology, it's possible to set prices that customers are willing to pay while providing you with the profit you need to succeed long-term.
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