For Small Business Owners & the Self-Employed

Insider Secret:

Essentials of Setting a Correct Price

Setting the right price for your products and services is a critical piece of the success puzzle. 

by Alex Goumakos, CPA



When was the last time you gave serious consideration to the price you charge? If you’re like many business owners--including some successful ones---you probably answered, “when the business started”, or “quite some time ago”.

Experience suggests that smaller business owners set price infrequently. And when they do set it, it’s without a thorough understanding of the implications involved. As a result, they short-change themselves by losing out on additional profits.

Consider this: The price you charge has a major impact on numerous areas of your business:

• Price determines your revenues and net profits
• It affects your market share
• It has the power to make or break a sale
• It determines whether your product or service is perceived as high or low quality
• It can compliment or destroy your advertising
• It determines which methods of advertising and promotions you choose
• It differentiates you from competitors if you sell the same or similar products or brands
• It determines what you’ll pay for costs and expenses such as wages, rent, office supplies, fixed assets, etc.

As you can see, setting price is a critical element of success. It’s so critical in fact, that even a minor adjustment could have a dramatic impact on your bottom line results.

That’s why it’s so important to set a correct price. A correct price is one that maximizes both profit and growth simultaneously.

You can’t set prices too high or else you’ll cut off demand. Conversely, you can’t set prices so low that your profit margins suffer.

Price must also be assessed regularly.

Keep in mind that successful pricing is not an end result, but a continuous process. If you don’t continually assess your prices, you run the risk of losing profits to increasing costs, competitors, or both.

After all, the marketplace isn't fixed. Things change all the time. If you don’t take a proactive approach to pricing, you allow your financial destiny to be influenced by outside factors.

The primary goal of any business is to make a profit. While many factors affect profitability---such as management, location, cost of labor, product quality, market demand, competition and so forth---the prices you charge have the greatest impact on your bottom line results.

This is because price is what determines your revenues. And profit is the difference between revenues and expenses.

A few business owners, especially new business owners, feel that they have to have the lowest price in order to succeed. As a result, they play a game that’s difficult to win.

While some businesses do become gold mines because of their low prices, setting a price that is simply the lowest is not prudent or advisable for most businesses.

The fact is: many gold mine businesses charge more than their competitors do.

Of all the theories and conventional wisdom about setting price, I believe the most successful are the ones that focus on factors in the marketplace rather than on your costs. 

Obviously, if you cannot sell your product or service profitably at your cost level, then you shouldn't be selling it in the first place. This is not the fault of your marketplace, but a flaw in your business model.

Buyers don't care about your costs.  They aren't concerned that your direct expenses are too high. They don't care about your profit margin or mortgage payment. 

What they do care about, is whether they can buy your product at a price that brings value to THEM.  Your costs are the last things on their mind.

But this is not to say that you shouldn't use costs as a factor in determining your price.  You absolutely should. 

But it shouldn't rule your decision. It should simply guide it. 

Five Key Factors

Setting the right price involves evaluating each of the following five key factors:

1. Costs
2. Industry
3. Competition
4. Market demand
5. Customer perception

To set a correct price for a product or service, begin by assessing the costs needed to bring it to market. In other words, how much is it going to cost you to produce, acquire, sell, and deliver your product or service?

After you’ve calculated your costs, consider the profit that you’d like to earn.

For example, if you’d like to earn an after tax profit of 20%, factor that into your calculations. Simply add your desired profit to your cost.

After you’ve determined an initial price, you must then fine-tune it using the remaining four key factors.

Although I've oversimplified the process of setting the correct price for purposes of this article, it's important that you know how each of these factors will impact the prices you set.

Keep in mind that setting price is both an art and a science. In my book "Gold Mine Tactics: The Business Owner's Success Manual" I cover all of these five factors in much more detail. 

I also provide highly effective pricing tactics that you can use to maximize your profits

Here's one last tidbit concerning price: 

Price is so significant and important that even an inferior product will sell, and sell well, at the right price. 

Likewise, a superior product will sit in piles in a warehouse if the price is too high. 

Never assume that your product or service will carry itself: Think of price as a means of HARVESTING your customers.