Lesson 1: Setting Prices
How to set fair prices for value so that customers are happy and the business is profitable.
Introduction
To run your business successfully you have to generate revenue and make a profit. To do this you have to set your prices low enough so that your products or services will sell well but high enough so that you can pay yourself and reach your financial goals. To do this in the best way possible you have to know your customers and what they value; your products/services and their advantages and your competitors and their weaknesses.
Traditionally businesses set their prices by looking at their costs, adding profit and thus getting a selling price. This is fine for getting an idea of about where your prices should be but what about the competitor across town who sells for almost half your price - how does he do that? And what about the guy down the road who seems to be doing a booming business but has prices that are much higher?
Then there are things you can do which will make your product or service better and more expensive - but do your customers want that? Is the improved quality you're giving them good value for them? And if it is good value, do they see it as good value?
What you want to do, when setting your prices, is find out what your potential customers value about your products and services, what additional things they would value and which of the things that you're putting in now they don't care about. Then you look at the cost of providing any of these things. You want to keep and add qualities which your customers value and which don't cost you very much. You want to get rid of things which they don't care about and which cost you money. Now you've got a good match between what your potential customers value, what you are going to give them and your pricing.
Next look at your competitors. What you want is to add things to your products and services that your potential customers value, that don't cost you very much but that cost your competitors more. If you can find something like that the you have a competitive advantage. You'll be able to set your prices lower than your competitor and you'll get the customers that value what you've added.
If everyone selling into that market acted that way, then each competitor would add those things which he did the best and at the lowest cost. Each competitor would have the best price for what he did best. The customers would win all around and everyone would make a fair profit.
That's the theory. It doesn't always work out that way but it's still the best strategy for a small business and, if you stick to it consistently, you will be able to compete effectively in most markets. Now, let's look at the details of how to apply this strategy.
