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Starting a Business: How to Price Goods and Services

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In this series, entrepreneur, business consultant and AIU School of Business faculty member Belinda Smith, Ph.D., leads aspiring business owners through the essential steps of creating a business plan. This is the seventh post in the series.

A product is a good or service that satisfies a consumer's need. Price is how much consumers are willing to pay for that product. Pricing strategies for your products are an important part of the business marketing strategy. Large companies hire marketers to determine their pricing strategy. So, keep this in mind while I discuss a few ways to price a product.

If you are manufacturing a product, determine how much it costs to make that product. Manufacturing cost is the total of labor and material costs as well as other costs associated with making the product. If the product is purchased wholesale, use the wholesale bill as the cost to manufacture the product. After determining manufacturing cost, include other business costs. For example, you need to include shipping costs, rent, and salaries in the total cost of providing the product to consumers. This information should be located in the cash flow projection of the business plan.

After determining the cost to provide the product to consumers, query your market to find out how much they will pay for the product. Also, investigate similar products on the market to determine competitors' prices. Based on your calculations and information obtained from potential consumers and competitors, determine if you want to sell the product at a lower, higher, or same amount as competitors' prices.

In order to get consumers to purchase your product instead of competitors' products, consider pricing your product lower than the competitors' similar product. Most new products are introduced to consumers by using this pricing strategy. However, you will need to sell more products at this amount to break even or generate a profit.

Another option is to price the product at the same amount as competitors but to offer a sales promotion in the form of coupons and discounts. Discounts and coupons reduce the amount of money earned from sales. However, consumers may see this as a great deal and purchase more of your products.

You could price your product higher than competitors, which sends a message to consumers that your product is of superior quality, but make sure it is a better product. If it is not, potential negative publicity from customers about the price and quality of the product can destroy the business. If the product is of superior quality, positive feedback from happy customers can help grow the business. Also, you may not need to sell as many products at a higher amount to start generating a profit.

When determining the cost of intangible products or services, start by determining the value of your time. This can be harder than determining the cost of a product for most entrepreneurs. A method that I use is to obtain hourly wage data from the State or Federal Occupational Employment Statistics reports. Your state Labor and Economics Analysis Division and the U.S. Bureau of Labor Statistics' Occupational Employment Statistics websites can provide a helpful starting point for determining the value of your time.

To make this calculation, search for your occupational title on these websites. Use the estimated hourly wage for that title to determine your hourly wage. Calculate the value of your time to include travel and preparation time along with the time spent performing the job. For example, if the data says that based on your occupational title, you should earn $30 per hour, and it will take you four hours of preparation time, two hours of travel time, and eight hours to perform the job, then the cost of your time $420 (i$30 x 14 hours). If you are providing tangible products along with the service, determine the product's cost and include that cost with the cost for your time then price your service higher, lower, or at the same amount as competitors' fees. This is the starting point for the fee for your service.

At the end of the day, regardless of what pricing strategies you choose, you need to make sure you can cover your costs and generate a profit. Doing this in the right way can help set up your business for success.

Any questions? Post them in the comments.

Learn more about starting a business and other business career paths in the AIU business blog.

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