SCORE Tip of the Week: Pricing Your Product or Service

Bob Goedjen of the San Jose, California chapter of SCORE gives tips for creating a pricing strategy for your business.

Of all the startup dilemmas facing a new small business owner, how to price a product or service is one of the most common. When pricing your product or service, you need to weigh many factors, such as the state of the economy, your competitors’ pricing and the needs of your target market, but here are a few basic rules to follow:

1. Base your price on value, not cost. Focus your “value estimates” on your target market customers. Take into consideration the value for the customers who have the highest level of need for your solutions. What would they be willing to pay to purchase what you’re selling?

2. Research the competition rigorously and price your product or service higher than the competition. In your research, you are far more likely to learn about a price that is lower than normal because of discounts and other special terms. Don’t make the mistake of trying to underbid your competitors based solely on their advertised prices.

3. Plan to provide room for discounts from your established price in order to give prospective customers the added incentive to place the order. This also allows you to offer price incentives to repeat customers in order to retain their business.

4. Provide your quotations for service type business based on your hourly rate. Consider your objective annual gross income based on about 1,000 billable hours per year. You will need the other 1,000 hours or so to do the work necessary to market and sell your services.

5. Continue to track your competition, not only for pricing, but also for the features they provide with the product or service that customers value. That means you must continue to ask your customers about their needs and follow up on lost sales to determine the true reason for the loss (it is usually not price). Question also whether you may be providing "features" that your market does not value.

About the Author

Bob Goedjen is a SCORE mentor at the Silicon Valley SCORE in San Jose, CA, whose expertise is in general management, sales and marketing. For your free mentoring appointment, visit www.score.org.