When starting a new business, there are a lot of variables to consider. What is your niche, how will you differentiate, where will you locate your shop…but even with all of that, one of the struggles that seem to cause the owner the most grief is product/service pricing. What strategy are you using to price? Are you aiming to have economical pricing, or are you trying to set yourself apart as a luxury brand? It may be difficult, but it is absolutely crucial to understand your costs and margins to make your pricing fair and understood.
For simplicity, we will use the example of a goods store, something such as a coffee shop or a convenience store. The obvious consideration is the cost of the raw materials, what you are actually putting into the product. The equation involves so much more though, and this is where people tend to struggle. First, in consideration of your raw materials, it is crucial to observe them often. Over the last two years especially, we have seen erratic jumps in almost any and all raw materials. Materials are not the only variable cost moving, as cost of labor has changed over the past year to adjust for higher minimum wages, tax increases and probably compensation packages to keep and maintain your workers. Your price must also take into consideration the fixed costs. Understand the costs to keep your store operating (utilities, depreciation, rent, insurance, taxes, indirect supplies) and even the cost of spoilage if it pertains to your shop. Do not forget packaging cost, if you incur. To properly determine prices, you must not only consider, but calculate each part of your basic accounting statement so you understand how much it costs you to run your shop hourly, even if you are not making sales. This is the place most people struggle, but it must be understood and analyzed then fairly worked into your pricing. When people push to have higher minimum wages, when raw material prices soar, when inflation is present, you must calculate and re-calculate those considerations to be sure that your numbers put you in a positive situation. Ultimately, your customer pricing must combine your business goals, market demands and customer expectations, while keeping you ahead as well. The work of a small business owner is hard and tiresome, and you need to be sure you are covering your own expenses, or the sturggle that will start will quickly effect the passion behind the business negatively. Numbers are the true foundation of any business, and that is why understanding them is essential.
To make your pricing more attractive to consumers, it is suggested you offer seasonal discounts and promotions to move items closer to volume goals. Be aware of what your competitors are charging, don't copy them but understand their pricing. Do not, and this happens more than it should, offer lower prices if you have not taken into account your own factors. Set goal profit margins on items to help your price be its best. After starting pricing initiatives, check back with your sales data and adjust if needed.
Jeff Bezos once said, ‘If you mess up pricing, you are not only hurting your reputation, you are affecting your profits.’
With that I wish you lots of luck as you branch out and begin your journey, or adjust your current one!
Xoxo,
Kelley
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