Finding the Right Price: How much should I charge for my business?

Lesson Overview

Apply your unique value proposition and competitor analysis to inform pricing

Understand different pricing models and when to use them

Utilize tools to calculate costs and optimize your pricing strategy

Prelude: A soap business

Sarah had a passion for creating handmade, all-natural soaps using premium ingredients. She knew her soaps were higher quality than mass-produced options, but she struggled with how to price them. At first, Sarah simply tried to match the prices of other handmade soaps she found online. However, she quickly realized this approach didn't account for her higher costs or the unique value her soaps provided, like their skin-nourishing botanical ingredients and lovely packaging.

By taking the time to carefully calculate her costs, identify her soaps' unique benefits, and research her target market's willingness to pay, Sarah was able to establish prices that captured the value she offered while still turning a profit. She avoided the trap of just copying competitors' prices and instead focused on pricing based on her own costs and value.

What are the key factors to consider when pricing your product or service?

As you've likely identified your unique value proposition and analysed competitors in previous lessons, you can apply those insights to help guide your pricing decisions. The price you charge should reflect the distinct benefits and value you provide relative to alternatives in the market.

Key factors to consider include:

Your unique value: Emphasize the elements you identified that differentiate your offering and make it better than competitors, such as quality, features, service, brand, etc. The more unique value you provide, the more you can potentially charge.
Competitor pricing: While you don't want to just match competitor prices, understanding the market price range is useful context. If competitors charge $50-$100, pricing at $200 could be challenging unless you clearly demonstrate your superior value.
Costs: Ensure your prices more than cover all of your costs, including materials, labor, overhead, etc. Utilize tools like the cost-plus pricing calculator shown above to understand your cost basis.
Target buyers: Consider your ideal customer profile and their price sensitivity. Are they seeking premium offerings or prioritizing low prices? Tailor your pricing to your target market.
Pricing model: Assess different strategic approaches like cost-plus, value-based, competitive, penetration and others in the context of your market and goals. Cost-plus is often a good starting point to ensure profitability.

Align your pricing with your overall positioning and brand image. A premium positioning warrants higher prices, whereas a budget positioning necessitates lower prices. Avoid sending mixed messages by ensuring your pricing matches your brand.

How to determine the right price for your product or service

Calculate your costs

Utilise tools like IdeaFloat's pricing feature to capture and total all of your costs per unit, including direct costs like materials and labor as well as indirect overhead costs. This will establish your cost basis - the minimum price you need to charge to break even.

Analyze your value and competitors

Review the unique value proposition you defined and the competitor analysis you conducted. Identify the specific ways your offering provides superior value that could justify higher prices than competitors. Also benchmark the high and low end of competitors' prices for similar products.

Consider your price positioning

Decide where you want to position your pricing relative to the overall market and competition, such as:

Premium: Pricing near the top of the market range to convey superior quality/value
Parity: Aligning your prices with the market average or key competitors
Value: Pricing below competitors to attract value-conscious customers

Choose a pricing model

Select a pricing model aligned with your business goals, market dynamics, and customer preferences. Common options include:

Cost-plus pricing: A simple model where you add a fixed percentage markup on top of your unit costs to determine the selling price. For example, if your product costs $50 to make and you use a 50% markup, you would price it at $75. This ensures you cover your costs and achieve your target profit margin.
Value-based pricing: With this approach, you set prices based on the perceived value you provide to customers, regardless of your actual costs. If your product delivers exceptional benefits, you can potentially charge a premium price. This requires a deep understanding of your buyers and the value they ascribe to your offering.
Competitive pricing: This involves setting your prices primarily based on what competitors charge for similar products. You might match their prices or intentionally price lower or higher. This is often used when there are many similar offerings and customers are very price-sensitive.
Penetration pricing: The goal here is to attract a lot of customers with an initially low price, and then raise prices over time. This can be effective for quickly capturing market share, but you risk customers being put off when you eventually raise prices to more sustainable levels.
Flat rate vs pay-per-use: For products/services with variable usage, you can charge a single flat rate for unlimited usage or charge based on actual usage. Research shows customers often prefer flat rates to avoid uncertainty around costs, even if they end up paying more.

Utilize pricing tactics Consider implementing some of these scientifically-proven tactics shared on Reddit:
- Purchasing Power Parity (PPP) pricing: If you sell globally, you can adjust your prices based on each country's purchasing power. Offering lower prices in less affluent countries can make your product more affordable and drive additional sales with minimal extra costs.
- Present prices in red: Studies found that men perceive prices shown in red as being meaningfully cheaper, while it has no effect on women. Since it can only help and not hurt, it's worth trying.
- Use round numbers: Prices like $100 are more effective than $99 because they're processed more fluently by our brains. Avoid numbers with too many syllables.
- Remove comma separators: The comma in "$1,000" makes the price feel higher than "1000". Remove commas to reduce the perceived magnitude.
- Reduce the left digit by one: Going from $4.00 to $3.99 drops the left digit, making the price feel substantially lower for minimal revenue impact.
Set initial prices

Based on your analysis, positioning, and chosen model, establish your pricing. Tools like IdeaFloat's pricing calculator make it easy to model out different pricing scenarios and gauge the impact on your profitability. Keep in mind you can always adjust prices over time as you learn more.

Test and iterate

Once you launch, pay close attention to sales data, customer feedback, competitor moves and profitability. Be open to testing different prices to optimize your strategy. You may need to raise or lower prices or offer promotions. Regularly revisit your pricing as the market evolves.

Example of how the handmade soap business portrays this lesson:

Sarah initially made the common mistake of simply trying to price match competitors without fully accounting for her own costs and unique value. By leveraging tools to calculate her true costs and reflect on her soaps' differentiated benefits, like their all-natural ingredients, she realized she was underpricing her products.

The cost-plus tool showed Sarah that her costs were $4 per bar of soap, and pricing at a 50% markup would lead to an $6 price. However, looking at competitor pricing, Sarah saw that most handmade soaps were priced $8-12. She decided her soaps' premium ingredients and attractive packaging were well above average, so a 75% markup to $7 seemed very reasonable.

This price captured her higher costs while reflecting her products' superior value. It also fit her desired brand position as a "masstige" soap - premium to mass-market brands but accessible to many. By methodically analyzing her pricing from multiple angles, Sarah was able to find the optimal price point.

Assignment

Using the IdeaFloat pricing tool or a similar cost-plus calculator, determine your product or service's cost basis.

Analyze at least three competitors' prices for similar offerings, and pinpoint how your offering provides additional value.

Select 1-2 of the pricing tactics discussed to test with your offering.

Write a brief summary of your pricing analysis, rationale for your price point, and plan for testing the selected tactics.

Knowledge Check

Why is it important to understand your costs before setting prices?

How can your unique value proposition impact your pricing?

What is the key difference between cost-plus and value-based pricing?

How can Purchasing Power Parity (PPP) pricing drive more global sales?

What are two ways to make your price seem smaller without actually changing it?