This week, our panel of entrepreneurs offers advice on setting a price for your company's product or service.
Q. What are your best tips and strategies for coming up a price point for your product or service?
The following answers are provided by the Young Entrepreneur Council. Founded by Scott Gerber, the Y.E.C. is a nonprofit organization that provides young entrepreneurs with access to tools, mentorship, community, and educational resources that support each stage of their business's development and growth. The organization promotes entrepreneurship as a solution to youth unemployment and underemployment.
Survey the market.
The most effective way to understand the value you offer is to talk with current or potential clients. Ask them what they need most from the product or service, and find out how much they value it. Ask them how urgent and important the solution is, and use their response to set a price.
Pricing communicates a tremendous amount to your prospective customer; it has an effect before, during, and after the sale. That is why creating a simple, easy to understand pricing structure can have a tremendous impact on whether your final price point will resonate with customers.
- Dmitriy Katsel, founder of AdU Network
Think in terms of customer value.
One of the most important things in pricing is creating strong value for your customers. If priced correctly, your customer thinks they are getting the best deal possible on a product they desperately need. Consider how much they pay for equivalent products, what they might pay a premium on, and how much of a premium they would pay for small but valuable extras.
What do you stand for?
You need to figure out what you stand for. Is it the best price or the highest quality? The answer will dictate the price that you set. It is a good idea to know what is going on in the marketplace, but if you have the highest quality, you can be the most expensive. If you want to be the cheapest, that's fine -- just make sure you still have a margin.
There's no such thing as "overpriced."
If there's one thing I've learned about pricing our services, it's that there's no such thing as being "overpriced." The only way you fall into that category is if the value you provide doesn't line up with what you charge. Instead of focusing on price, focus on value and on providing a superior product/service to your clients. When they perceive value, the price matters very little.
Don't stop testing.
Determining the right price can seem like your greatest challenge, but it should also be your greatest experiment. Talk to your customers, determine your value proposition, and continue to test. If you can drive $2 million in value, you can certainly charge $1 million. Get to that point!
Determine what you need to make.
I recommend deciding on revenue and profit goals first. Then work backwards and figure out how much you need to charge to meet your goals and to cover your expenses, and the time involved in delivering the product or service. If that price is higher than you've been able to charge in the past, try expanding into higher-end markets or investing in sales training.
Always offer a free or almost free version of your product/service to give customers a taste. Then offer tiered pricing based on the level of flexibility, volume, and access a client wants to have. And if they can upgrade/downgrade anytime, no questions asked, they will absolutely love you!
Research your competition.
Call your competitors and ask for a quote from the services they offer to determine price points. That is the fastest and easiest way to get a starting number. Ultimately, economics dictates what people are willing to pay, so that will also drive the final price paid for service. You definitely want fixed prices you can stick to, but you should also be flexible with long-term clients.