One of the most difficult, yet important, issues you must decide as an entrepreneur is how much to charge for your product or service. While there is no one single right way to determine your pricing strategy, fortunately there are some guidelines that will help you with your decision.
Before we get to the actual pricing models, here are some of the factors that you need to consider:
Positioning - How are you positioning your product in the market? Is
pricing going to be a key part of that positioning? If you're running a
discount store, you're always going to be trying to keep your prices as low as
possible (or at least lower than your competitors). On the other hand, if
you're positioning your product as an exclusive luxury product, a price that's
too low may actually hurt your image. The pricing has to be consistent with the
positioning. People really do hold strongly to the idea that you get what you
· Demand Curve - How will your pricing affect demand? You're going to have to do some basic market research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want to do something more formal, of course -- perhaps hire a market research firm. But even a sole practitioner can chart a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy, and at Z price Z' will buy.
Cost - Calculate the fixed and variable costs associated with
your product or service. How much is the "cost of goods", i.e., a
cost associated with each item sold or service delivered, and how much is "fixed
overhead", i.e., it doesn't change unless your company changes
dramatically in size? Remember that your gross margin (price minus cost of
goods) has to amply cover your fixed overhead in order for you to turn a
profit. Many entrepreneurs under-estimate this and it gets them into trouble.
· Environmental factors - Are there any legal or other constraints on pricing? For example, in some cities, towing fees from auto accidents are set at a fixed price by law. Or for doctors, insurance companies and Medicare will only reimburse a certain price. Also, what possible actions might your competitors take? Will too low a price from you trigger a price war? Find out what external factors may affect your pricing.