How to Price Your Product (or Service)

Pricing a product or service is perhaps one of the most difficult areas of new business planning. What price tag can you place on the value that you provide your customers? What's the magic formula?

The truth is, there is none.

As you work through the competitive analysis section of your business plan, you may begin to realize that while price does play an important role in your business, it's not as important as one might think. If the success of your business is based solely on offering the lowest price, you may wish to reconsider. Many a business has gone under with this strategy in play.

Consider this true story: A talented professional wall muralist was pricing herself out of business. Her prices were much too low, but she didn't realize this. She thought her customers could not afford her work. Every job quote became an exercise in price negotiations. On the brink of cleaning her brushes for the final time, she decided to raise her prices substantially. The result? She began to attract a much more affluent clientele. Her business is now thriving, and she has a waiting list for in-home and in-business wall murals.

How Your Price Your Product Determines the Type of Customers You Attract

Basically, there are three tiers for pricing:

• Discount
• Customary
• Prestige

In the world of chocolate, a business providing this sweet treat focusing on discount pricing might offer bulk or generic chocolate—perhaps not the tastiest option, but one good on value per price. In comparison, a mid-level store might offer a customary product, such as candy from Hershey or Mars. The candy at this level is a bit better and a bit more costly. On the upper scale, a candy boutique with prestige products with higher prices might offer Godiva chocolates or something similar. This chocolate, for some, is worth every penny per pound.

Which is the best pricing strategy? It depends on the business and the type of customers it is trying to attract. In this example, each is successful in its own way, with different target audiences, packaging, and pricing.

The muralist in the earlier example jumped from discount pricing to prestige pricing—a big risk, but one that rewarded her well.

Take a moment to consider whom you are trying to attract to your business. (“Everyone” is not the proper answer here.) Describe the ideal client walking through your business door or clicking on your website. How will you price your offering to attract and keep this customer?

A Pricing Strategy Should Be Flexible

Once you determine your pricing strategy, be prepared to change it.

Let's consider yet one more example of pricing. At one time, fiber optics was a hot new technology. Companies involved in this technology were selling solutions, oftentimes unique and customized. Today, fiber optic cable and components are commodity items. The winners in this industry today are those that can play the price war game, often having a larger parent company to shoulder the fluctuations and losses.

As industries change, so do the companies that support those efforts. As your marketplace evolves, your business will have to evolve, too. You must constantly evaluate your pricing structure and position in the marketplace.

Your pricing may be based (at least initially) on material costs plus a percentage, an hourly rate, or the value added to a product by what you do with it. What a business in rural New England charges for a service will be quite different than that same service offered in New York City.

Is Your Product's Price Right?

What then is the best price? The answer here is quite simple. The best price is the price the customer is willing to pay today.

RELATED: Are Your Prices Too Low? It’s Time to Rethink Your Pricing Strategy