Many entrepreneurs struggle with pricing. They look at their costs, add a profit margin mark-up, and hope that people will buy at that price. When they don’t, entrepreneurs resort to discount offers much of which is either ignored or results in developing a very expensive hobby rather than a profitable business.
The proper way to price your products in a competitive marketplace isn’t about adding up your costs and then allowing for a profit margin. It’s not about being the cheapest. To compete solely based on price is a recipe for disaster because once a more valued competitor meets your price your sales will likely grind to a halt.
The simple truth is your market doesn’t care about your costs. All they care about is how they value what you have to offer based on what else is out there – what else can help them solve a problem or achieve a goal of some sort. All they care about is what’s “in it” for them if they buy your type of product and why they are better off buying it from your company rather than your competitor.
As an entrepreneur, you care very much about your costs. To sustain a viable business you have to be profitable. Essentially you and your customer value your products and services through an entirely different perspective.
How do you align the value of your product in the marketplace? Through a very simple five-step pricing process as follows:
- Research competitive pricing.
A competitor is whatever product your market is currently using or looking at to solve their problem or meet their burning desire – even if that product or service is completely different from yours. What are the prices of your top five competitors?
- Identify where your product fits in the competitive price range.
Remember, your market doesn’t care about your costs or the time it took you to develop your product. All they care about is how they value it compared to the other products they are considering. Based on the customer benefits and competitive advantages your product offers to the market (not costs or features) where does your product fit in the competitive price range?
- Run your numbers (costs) to see if you can be profitable at this price.
In addition to your COG (Cost-of-Goods) you have other costs.
In this process determine how many products you’d have to sell each month in order to be profitable and what it will take (costs) to sell that many each month. Is this number realistic? What will it take (marketing costs, etc.) to reach this level of sales volume consistently? What is your burn rate until you reach profitability? Consider the difference between actual cash revenue realized each month and invoiced revenue that won’t be in your bank account until days, weeks or even months later.
- Are you priced properly within the competitive pricing range?
If you can be profitable at that price then you are likely priced properly. If not, then figure out what advantages you have (or can develop) to justify an increase in price, an increase in the value placed upon your product by the market. Find ways to reduce your costs. Leverage channel sales and visibility partners to help you sell more volume.
- Are you profitable at a wholesale level of pricing?
If you are selling your product through sales and distribution channels then make sure you can be profitable at the wholesale and distributor level pricing.
When you price your products based on how your market values what you offer you increase the value of your brand and the relationship you have with those you serve.
Most startups struggle and fail. Valery Satterwhite specializes in the success of fast growing startup businesses. She helps startup entrepreneurs get, keep and grow customers and excite investors. Startup entrepreneurs and founders. avoid the big and costly mistakes that derail a lot of startups, even those with great ideas. For more information please visit http://www.NailMyStartup.com.