Small Business Tip: How to Price Your Products & Services for Maximum Growth

For the small business owner, there is no task more daunting than pricing products and services. There are several methods for determining the price of a product, including zero sum pricing, competitive pricing, and premium pricing. But coming to a real starting place becomes more confusing when you try to decide what "method" of pricing is most appropriate for your products or services.

What most small business owners do is look at their competition and say, "Well, they're selling this product for $39. So let's sell it for $34 and we'll have an edge on them." In the long run, this can undercut the value - and the perceived value - of your products and services in ways that leave a lasting impression.

So what is the small business owner to do? Take a breath, grab a cup of coffee or tea, and sit back to think about the simplest way to go about pricing your products and services to achieve real growth in your business, and ensure that you're making a profit. That simplest way means combining a few ideas to end up with something solid.

Idea One: Real & Perceived Value

There is simply no way around doing your research on the competition. You absolutely have to know what they're offering, how similar their products are to yours, and in what ways their product is superior or inferior to yours. The same concept applies to services offered by small businesses.

Let's use a real-world example: Rolex vs. Seiko.

Rolex watches are top-dollar, so coveted that street vendors happily sell cheap knock-offs of the product, which people eagerly snatch just to have the "Rolex Look". Does a Rolex watch tell time any better than a Seiko? No. Even the cheap knock-offs that look so much like a Rolex keep time just as well as any other watch. But Rolex has a perceived value that is much higher than Seiko, so they can charge much more for their product.

This idea comes down to determining the actual cost of your product or service based on labor and materials. Want to make $20 an hour? Figure that into the cost of your labor. The result you end up with is the "real" value of your product before mark-up.

Perceived value comes next. What do your products or services have that the competition doesn't? For a product, this might come down to higher-quality materials (leather versus pleather), rare items (such as precious gems and metals), or uniqueness. Services need to calculate in things like customer support, ease of reaching that support, follow-up services, and unique "free" additions that the competition doesn't provide.

Assign a value to these unique additions. It doesn't have to be a staggering value, even a few extra dollars is enough. This is the start of perceived value before mark-up.

Idea Two: Tiered Pricing

The idea of tiered pricing is exemplified by the automotive industry. When you look at a car model, you usually start with the "base" model that looks pretty snazzy but doesn't have all the bells and whistles. To get those bells and whistles, you can go up a step or two in pricing. The next step usually offers most of the bells and whistles, but not the over-the-top luxury. The top step in pricing includes all the bells and whistles, luxury conveniences, and a hefty price tag.

Small businesses can really do a lot with this idea of tiered pricing. Not only do different price points allow you to attract more customers because they can always find something in their budget, but it also helps you keep your customers. If someone purchases a smaller, inexpensive item from you and loves the quality, they're much more likely to come back and spend real cash on something of even higher quality. You've proven your product or service to be reliable and worth every penny.

A few things that tiered pricing can do for your small business:

1. People love a bargain. If they see that they can get a "better model" for just a bit more, they're usually too tempted to resist.

2. Having a lower priced "base model" that undercuts your competition is a good way to get notice. Make sure that this base model is just as high quality, but it doesn't have to have all the extras that pricier models do.

3. Providing a range of prices allows you to gain a customer's trust. As they continue working with you, seeing that every product or service you offer is top-rate regardless of the pricing tier, they become loyal.

Combining the Ideas into a Pricing Model

When you stop and think about it, the idea of perceived value plays right into tiered pricing. By giving the customer options - "Would you like that gorgeous shirt in cotton or silk?" - you're also allowing your products and services room to grow.

In other words, don't think that there is no way you can make your products or services work on a tiered model. Think of ways that you can offer your work in increments. Products are easier to do this with, because of the nature of standard versus premium materials and the amount of labor involved, but services will work the same way. A graphic designer can offer a basic website package that includes just a website template and support, and a full-service package that includes the website design, upload, initial content, and support.

Take the time to really do your homework on the competition. Note down not only the prices of products that are apples-to-apples in comparison with yours, but also note things like the materials used, colors offered, add-on services available, and number of days of free support that are included with a purchase.

Then, figure out the perceived value of your own products, before mark-up, and compare these costs to those of your competitors. If your before mark-up cost is more than your competitors' selling price, decide whether you want to go for a higher perceived value based on the quality of your product or service, or if it will be more beneficial (and not hurt your own morality) to use lower quality materials and supplies so that you can at least meet your competitor's price once you mark up your product.

On that note - what is a good mark-up? It's honestly up to you. Most people suggest a mark-up between 25 and 50 percent if you're offering your products wholesale, while a profit margin of 75 to 200% mark-up is recommended for retail. What this comes down to is what you can live with, what you can afford to do, what will keep you making a profit, and how it compares to your competitions' prices.

Finally, if you decide to really play up the perceived value of your product or service, take the time to do the background work as well. Make sure you have a good, strong logo and a business identity that is solid. Your products should be packaged in ways that exude quality, and your services need to be detailed with all the benefits that you provide which no one else can.

Once your pricing model is complete, don't get too comfy. You'll want to test it out. Go for a few months, seeing what response you get and marking the products or services and markups that are selling the best. Go back through the basics and see what it is doing (have you touted the benefits more clearly, offered higher-quality packaging, made it look so unique that everyone and their uncle has to have it?) and go through the rest of your products and services making adjustments based on what you find out. Then ... test again.

Don't be surprised if you find yourself testing for at least 6 months before you hit the sweet spot that starts causing your products and services to be in so much demand you can hardly keep up with it. Once that happens, take full notes on everything that you're doing and put it into practice with each and every product or service you expand into.