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How to Price a Product or Service

by Margot Carmichael Lester, Staples® Contributing Writer

You want to make the most money, and your customers want to pay the least. Hopefully, as you decide how to price a product or service you sell, you can find somewhere the two of you agree, right?

Wrong! You can’t leave your pricing to “hope” — it’s far too important to your business.

“Price too high and you won’t get any orders, too low and you won’t make enough money to stay in business,” explains Janet McKean, owner of LOST & FOUND, a product representation and retail consulting business in Hillsborough, NC. To avoid miscues, explore these pricing strategies.

How to Price a Product

There are two main product pricing strategies: cost-up pricing and price-down pricing. “Do both,” advises John Hickman, regional director of the Eastern Region Maryland Small Business Development Center in Salisbury, MD. “Compare them — the numbers should come out close — to uncover mistakes or miscalculations.”

Cost-Up Pricing: This is the most basic way to set product prices, and involves adding up everything you need to produce your product, from raw materials to the power bill and taxes. There are many costs you probably won’t think about, like delivery charges, packaging and representatives’ fees. “Develop a checklist of all the actual costs and how those may or may not change,” says Hickman, who’s also an adjunct professor at the Perdue School of Business at Salisbury University. “Talk to someone who isn’t a direct competitor within your geographic market, suppliers and advisory groups like the SBTDC.” (Find a Small Business & Technology Development Center in your area.) Small business bankers, industry trade organizations and accountants who’ve worked with companies like yours also can offer insights.

Price-Down Pricing: This product pricing strategy begins with market rates and works down. “Start with what the consumer will pay and work back to cost of goods (material purchases, direct labor, subcontractors and other direct costs) and manufacturing,” McKean says. If your product is markedly better, you may be able to charge more; if it’s markedly less expensive to make, you may be able to charge less. “Your customers will know who your competitors are and how their products stack up, and they will ask why you are different and/or better.” If you’re selling wholesale, don’t forget to factor in mark-ups, she adds. “They’re determined by the retailer; 2.5 percent is pretty standard in the gift business. Trade groups can tell you what the average is for your sector.”

When Christopher Beikmann decided to make and sell his art on cell phone cases in 2010, there weren’t many competitors to compare his pricing to. So the Aurora, CO-based creator of the Da Vinci Case considered these factors to determine product pricing:

  • What do similar cases with and without artwork sell for at service provider stores?
  • All of my artwork is exclusive to my brand. I am the artist — what is that worth?
  • What are my expenses in running the business besides material costs?
  • Do I have enough profit margin to wholesale the cases? Do I want to be able to wholesale them?
  • Do my margins leave enough funds to reinvest in the company to keep up with the ever-changing device world?

“In the end, in order to have margins high enough and control the quality to my expectations I realized I had to bring all art reproduction and final assembly in house to my studio,” Beikmann explains. “It was a big investment in equipment, but it has allowed me to offer a more differentiated, higher-quality artisan case product.”

How to Set Prices for Services

Service pricing is simpler in one respect: There’s no cost of goods sold, so expenses are mostly overhead like rent, utilities, office supplies, etc. “Look at what your expected volumes are and how much variance you have if you don’t meet them,” Hickman explains. “Find your break-even and how long it will take to get there.” Of course, this requires research. Ask professionals offering similar services what they charge and why; and ask friends who purchase similar services what they pay. Trade groups can also help, as can bankers, accountants and financial experts with relevant experience.

Denise Sakaki, a Seattle-area graphic designer, illustrator and photographer, set prices for services she provides by talking with trusted friends in the industry and considering all the factors involved in actually doing the work. “It's primarily time since I only deal with files and not physical merchandise,” she says. “But that time isn't just design work, it includes client and project management as well, like time spent for meetings. Your time is valuable and represents your expertise, so you want to account for everything. You're always worried about whether a rate is too high or low. Ask yourself, if you lowered your rate…could you continue to make ends meet?”

How to Get the Pricing Right

Knowing how to price a product and set prices for services are critical skills for every small business owner. Getting informed insights from experts is crucial, but at some point, you have to set a price and put it out there.

“Keep notes on how you determined price so if you make a mistake you can easily find it,” Hickman counsels. “In start-up mode, look through your notes once a month and track your actual results. Make corrections going forward and you’ll be in good shape for the long haul.”

 

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