Pricing Strategies (Part 1)

By Rolfe Larson on May 18, 2011

Figuring out how to price your products or services is often very challenging, especially for a new venture.  Yet you need a pricing strategy for your business plan, to determine your break-even point and profitability, and of course to launch your business.  Here are some tips on how to make that decision:

Ultimately, the right price is usually the highest price customers will find attractive — that is to say, that they will find meets or exceeds their value expectations for the product or service you’re offering to them.  That’s much easier said than done, so let’s start with some steps for getting there.

First, determine your unit costs

Generally this should be relatively easy.  What will it cost you to purchase, produce and sell your products?  You may not know the precise figure, but you should have a pretty good idea by the time you write your business plan.  Generally speaking, that represents your price floor; sell below that and you lose money.

Next, determine how customers value your products

This is where market research is needed.  The good news is that customers will tell you how much they’ll pay — if you can find the right way to ask.  You can’t just ask them  directly, for tons of research show that what they say and what they’ll do are two completely different realities.  But what you can do is find out what they pay for more or less comparable things, and how they value various attributes of your product or service, particularly those different from your competitors.  Be sure to study the pricing strategies of your competitors.  Not necessarily to imitate but to recognize that your customers will be comparing what you offer (product, price, service) with what they offer.

Next blog: what kinds of pricing strategies are there?  [Special thanks to Jennifer Li Shen and Way-Ting Chen for their work on this topic.]

Good luck!

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For more resources, see our Library topic Business Planning.