How Much Should I Charge?
One of the common questions I hear is, “How Much Should I Charge”? I get this question from startups and existing businesses that are bringing a new product or service to market.
When you’ve been doing it for a while, you realize that deciding how much to charge for a product or service is as much art as science. However, as with most things, even though there is some art involved, it is not usually the best idea to just “throw the paint against the wall” and hope for the best.
Before you decide on an initial pricing strategy for your product or service, you should gather some key data that will help you make a better pricing decision. Here are several data points you should obtain before deciding how much to charge:
- What is the pricing for similar products or services in the market? The easiest way to track and update this information usually is to create a simple matrix, either in a spreadsheet or word processing table.
- How segmented is your target market? Are there several price levels for similar products, depending on the attributes of the products and the characteristics of the segments?
- How do existing users perceive the current products in the market at various price levels? Bear in mind that many times you want to be at the higher end of the price range as a small provider. You typically don’t have the opportunity to sell a huge number of units as a small business, so you want to be able to make a healthy profit on a smaller number of units.
- What are the product or service attributes that existing users value most? Often times you’ll be better off including fewer attributes, but making sure that those are the ones that users value most. You do not want to over-engineer your offering and create the equivalent of what is referred to as “bloatware” in the software industry. When you are obtaining this data, make sure you are talking to as many real, live people as possible, through whichever medium of communication you can. Do not guess. Talk to real potential prospects wherever possible.
- How much does it cost you to create and deliver the product or service? Don’t make the common mistake that I have seen over and over again, wherein you don’t have a good understanding of your costs and end up pricing your offering too low, thus losing money unnecessarily on every unit sold. Note that once you have a good understanding of your costs, you often times have to go back to the drawing board in order to figure out how to produce your offering at a competitive level.
- How much profit do you want to make? Once you have gathered the data above and determined the level at which you can realistically price your offering, given the competitive landscape and your production cost realities, you may realize that you’re not going to make much profit. In that case, you can consider how you may differentiate your offering, so you can price higher, or you can figure out how to reduce your costs, or both. However, if after doing all that you cannot arrive at a projected profitability of the offering that is acceptable to you, you’ll need to walk away. That is, unless you have motives other than reasonable immediate profitability for the offering.
- Do you have motives other than immediate profitability for this product or service? There are times when even though your pricing analysis tells you the offering is going to be a “dog,” you still decide to move forward with it. Such motives may include the idea that this offering is going to be a “loss leader”. In other words, although you know you will lose money on it, it will bring prospects to you, to whom you will sell other more profitable products or services.
- Do you expect to have “economies of scale” when you get to certain production levels? Sometimes you start out with a product or service that is not as profitable as you’d like, but you know that as your sales volume grows you will achieve economies of scale and thus have greater profitability. The idea with economies of scale is that once you are producing or providing a certain number of units, your costs go down for some, if not all, elements of the offering. This may be due to reduced unit material costs when you buy in certain volumes or to advantageous contracts you’re able to strike with suppliers.
So, in order to intelligently answer the question, “how much should I charge?” you must first arm yourself with several pieces of data. This data comes from your prospective customers, your competitors, your suppliers, and from your own operation. Realize as you start this process of determining the right price for your offerings, it is as much art as science. Not every piece of data that you gather will be “black and white”. You will need to make a series of assumptions and you will need to test and re-test those assumptions on an ongoing basis. You will need to be flexible and not believe that there is one “right answer”. As you go, keep in mind the question, “if I can charge more and the market is willing and perhaps even happy to pay it, why wouldn’t I?” Also, remind yourself on a regular basis that you’re in business to make money, so if your analysis says otherwise, don’t convince yourself that somehow a particular offering that isn’t profitable in the beginning is somehow going to magically become profitable later on.
I look forward to your thoughts and comments.