After reading a great article on Business Boss by Wendy Martin pricing products and services I wanted to share my much more general approach to setting prices.
Attribution: Pixabay - PublicDomainPictures
Work out your costs
One of the most important factors is of course to work out your costs. For example in one place I worked at my boss finalised a sale for our software product. It was at a fairly cheap price but that was okay because we were trying to enter into that market and it was a good sale to help us to do that.
Attribution: Pixabay - geralt
Then I went back and worked out the cost of tendering for that sale. That is, how much time and effort was put into the sale and our success rate for winning sales. The result was that the price was actually less than the cost of making the sale.
So always know the cost of your products and services. No matter what you are selling, this is vital. It isn't always easy, especially as often a lot of pricing is dependent on economies of scale, as well as other tricks such as repeat sales and upsales. Which is why we don't just rely on cost to set the price.
Work out the value to your customer
One of the best examples of value versus price are airline tickets. Most people will have noticed that flights with a stop over are much cheaper than most direct flights. What is surprising is that if you were to fly from say Hong Kong to Sydney your plane ticket would be more expensive that someone who flew from Tokyo to Sydney with a connection in Hong Kong, even if they were on the exact same flight from Hong Kong to Sydney. It is simple, while the cost of the indirect flight is higher the value is much lower than a direct flight.
Attribution: Flickr - Kristofer Bjorkman
Every product or service is that same. Companies will happily spend $30,000 on a website because it can generate more revenue than that. This is why web designers who charge $100-300 an hour still exist, even though you can have a website created for $5-10 an hour by someone in Bangladesh.
Just as a side note, you have to realise that customers will pay for the perceived value, not the actual value.
Compare against market rates
The third factor to consider when setting your prices is what are the current market rates. I always like to think about staff recruitment when I think about market rates. If you pay staff above or below market rates you often have problems. Pay too low you only get staff no one else employ and ifyou pay too much, often staff who hate the job refuse to leave because they can't find a similarly paid position. Yet many employers find themselves in this situation simply because they didn't bother to find out the market salaries for those positions.
Attribution: Pixabay - geralt
So any business owner should be able to answer the following questions.
1. Who are your main competitors
2. How much do they charge for the products and services
3. What is the value of those products to the client.
4. Is my product or service of a higher or lower value to the client.
These sound like obvious questions yet many businesses are unable to answer these simple questions.
Putting it all together
In the end the price that you set should be combination of the above three considerations. Of course sometimes you realise that your costs far exceed the value of your product or the market prices and you need to abandon the market or find ways to reduce your costs.