Pricing Guide: How to Price Your Products or Services | Fora Financial
The Ultimate Pricing Guide: How to Price Your Products or Services
July 26, 2019

The Ultimate Pricing Guide: How to Price Your Products or Services

As a business owner, your products and services define you — and ultimately determine whether your company will be successful. If you’ve made the decision to start your own business, you probably have a great idea that addresses an underserved market. So, how do you ensure that the price you charge fairly compensates you for the value you create for your customers?

Many new business owners make the mistake of underpricing their products and services to attract customers. This strategy may bring business in the door initially but can create problems down the road. On the other hand, overpricing yourself might scare customers away for good.

Fortunately, it’s possible to charge your customers a fair price while maximizing your profits and staying competitive in the marketplace. To help you find the sweet spot, we’ve compiled this useful pricing guide.

Everything You Need to Know About Pricing Your Products and Services:

1. Set Clear Profit Goals

Before you can set your prices, you must be clear on your profit goals. A business that doesn’t make money isn’t really a business, so you need to make sure the prices you charge allow you to not only survive but prosper well into the future.

According to a study by U.S. Bank, 82 percent of businesses fail due to cash flow problems — so understanding your free cash flow needs is critical.

It’s also helpful to have an idea of where you want your business to go. Do you eventually want to increase your offerings or hire more people to expand your reach? You should clearly identify your business goals and how much money you’ll need to achieve them, whether that’s on a weekly, monthly, or annual basis.

2. Understand Your Competition

The flexibility you have in pricing your products and services largely depend on the availability of substitutes. If several other companies have a similar offering to yours but are charging significantly less, it might be challenging to convince customers to choose you.

On the other hand, many experts recommend not competing on price alone, as this can quickly become a race to the bottom and introduce a host of new issues. If your industry is prone to high competition, consider differentiating yourself in a way that allows you to charge more for your products and services, not less.

3. Know Your Ideal Customer

Identifying your ideal customer can provide meaningful insights into how you should price your products and services. For example, if you’re selling high-end luxury items, your ideal customer likely has a significant amount of discretionary income, giving you more pricing freedom. Conversely, if your business primarily targets students, you’ll need to understand their spending habits — which are likely more conservative.

In addition, if your business already has consistent customers, you can conduct your own research to help you understand what they’re willing to pay for your products and services. Otherwise, you can begin by researching broad segments of the market to understand their needs and spending habits.


4. Track Your Costs

At a minimum, your price must cover your costs. Therefore, it’s essential to track everything that goes into delivering your products or services so that you can turn a profit. For products, this may include raw materials, labor, delivery costs, and transportation. Service-based businesses may have fixed overhead costs such as rent and technology. Once you know exactly what it costs to produce one unit of your product or provide one hour of service, you can set your price accordingly.

5. Pick a Pricing Model

When it comes to pricing, there’s no one-size-fits-all approach. You may need to go through several iterations of trial and error before finding a pricing system that works for you. That said, there are numerous pricing models you can leverage to help get you on the right track. Ultimately, you may find that tailoring one or more of these strategies to fit your business model is the best solution.

6. Know Where the Market is Headed

It’s important to incorporate enough flexibility into your prices so you can adjust them as market conditions change. If your product relies heavily on raw materials that are prone to dramatic price fluctuations, you don’t want to lose money if your costs suddenly rise.

Similarly, you may foresee an event that might create significant demand for your product or service, allowing you to increase your prices and capitalize on this new market need. Staying ahead of industry trends can help you set prices to maximize your profits.

Conclusion: Pricing is Equal Parts Art and Science

There’s no silver bullet when it comes to price-setting. It may take you a few tries before you find a price that allows you to meet your profit goals and attract your ideal customer base. However, if you follow these guidelines, you can avoid many of the mistakes new business owners make and set yourself up for success.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].