Small Business And Pricing
How do I determine what to price my product or service?
The first thing you have to understand when pricing your service is the cost to do all these things provide simply a baseline. In other words you say, "The materials cost so much, laborers cost so much, marketing costs a whole lot - always more than anything else - and now here's what I'll charge." That is not a good idea, because maybe the price that you end up with is too high, which simply says you have to find a different way to cut the cost. You simply can't sell that product at that price. The costs simply provide the bottom line; you don't want to go below that because then you're just losing money. Of course, if you'd like to do that, and you have the money, that's great, but normally that's not what you want to do. That's the first thing to think about when pricing your services. The second thing is to look at what your competition is charging. If you're selling a brand new product, you can look at the cost savings that are involved. Your strategy for a brand new product is to go in fairly high. As competition comes later on - because you can't protect your device perfectly; there's all kinds of ways of getting around even patents or copyrights - you lower your price and do it that way.
How does price affect the "image" of my product?
You have got to remember that price has an image value. I'm told by a lot people including my wife, Why are you buying the most expensive? She says "Well, that's the best". How do you know? She says "The most expensive... right?". In other words, it's considered one way to an image... as our image. So, you have got to be careful. Now, maybe you can price very low, but you got to recognize what that's going to do to your image. It's difficult to raise the price later on if that's your intent. I talked to a lot of people including attorneys that come or have come to me in the past for advice on marketing and they went in really low. They hang out their shingle to get business. They went in low, and now, when they go to raise their price, they lose their business, everything, because they've identified themselves in a certain way because of their pricing.
Why is pricing important for my business?
First thing: because of sales. As I mentioned, even though you think if I go low I will have more sales, it's not necessarily true. It is like a doctor. If you have the money, are you going to go to the cheapest doctor? I don't know. The guy is liable to charge anything. I don't know. If I am desperate, yes, but that is an important thing. It depends on how much sales you have. Off course it is going to effect your profits, how much money you have to invest in other things. How you respond to a competitor has to do with pricing. Pricing is one of the quickest things we can do. You have to be careful about cutting the price for example. That's where you get into things like coupons and discounts and so forth. That way you can preserve your basic price even though you are really cutting that 25%, but you can always return to the original price.
What is "non-price competition"?
One basic way is price, in other words you are going to beat them on price; you are going to offer the same thing but you are going to do it cheaper. There are some dangers in this that we've talked about because of image, but it's doable though. However, if you are going to do non-price competition, what else do we offer? You can't just say "Well we give better service,"; what does that mean, what exactly does that mean? You can specify that as one thing; for example, when everyone else develops your photographs in one hour we do it in two minutes. Ok, that's something right; that gives an advantage. You can say that you are willing to pay for something like that; you know it's deserving and so you are willing to pay the price. So, that's now called non-price competition. Non-price competition can be something like that, or can be something else. Maybe your widget (people like to talk about widgets) is indestructible (which just means anything of course) and theirs is not. So, "My widget lasts hundred years; your children's children's children will inherit this widget, and it will still work!" That's worth something maybe; that's non-price competition.
When should I consider lowering my price?
You should consider lowering your price if something's not working or if a competitor is entering the market. Maybe you were the first business into the market with something and now people are coming in with a similar new product. Maybe you're the first one with a hula hoop and all of a sudden other people are getting in. You might lower your prices then to meet the competition.
What is a "price margin"?
Regarding small business and pricing, with a price margin, it costs you so much to produce this item and now you're charging so much. So let's say that for in the case of garden hoses it costs you two dollars and you're charging to the wholesaler four dollars. Okay, here the margin is two dollars and you make two dollars on that. Now, the retailer may add something additional to that so maybe six ninety-five we'll say is the retail price, so he's paying four dollars now; he is makes two dollars ninety-five cents on that deal from four dollars and six ninety-five. That's a price margin in business.
What is the difference between a "wholesale price" and a "retail price"?
Wholesale price is the price that you are going to sell to the retailer. Typically, there's different margins, different retailers, and different types of products. For example, a bookseller's margin is roughly 50 percent. In other words, if the book retails for $20, the bookseller will pay roughly $10 to purchase the book. Now, the manufacturer and publisher may pay for printing and other expenses in the region of two or three dollars. Now, back to the margin issue, if the bookseller is selling the book for $10, then between $3 and $10, you make $7 per book. And that's why the wholesale price is $10. Now the retailer sells it at $20. And the same for clothing, by the way. In fact, clothing, they pay even less than that. That's why they can afford to take a lot of cuts when they have these sales. They're still making money on the deal.
