Setting pricing is always a delicate task, not least of all for a small business.  There are many factors for the entrepreneur to take in to consideration, including how much money you need to make from selling an item.  In addition to cost, there are marketing factors at play.  As part of your business planning process, it pays to know the economics and psychology of your good or service before you set your prices.

Know Your Costs

If you have done a break even analysis as a part of your small business planning, then you know that you will have to sell a certain amount of your product in order to cover your overhead.  You will also have to take into account what your product costs you to make.  After that comes the profit.  How much profit should you aim to make from each unit sold?

Know Your Elasticity

Economists talk a lot about price elasticity of demand.  This is a very intuitive concept. If your product has inelastic demand, the public will buy it, whatever the price.  If your product has elastic demand, then the public will buy less of it when the price is higher.  If you are selling water in a desert, you can set higher prices and your customers will still demand the same amount. If you are selling something inconsequential like bubblegum and the price goes up, your sales will slow accordingly.

Know Your Customers

Who is your ideal customer?  If your ideal customer has a lot of disposable income and is looking for a product that is of a high quality, you want your prices to signal that quality.  If your customer is one who is struggling financially, then you want your price to signal value.  You can’t be cheap and expensive at the same time, so you will have to pick one or the other.

Know Your  Competition

Who are you competing with?  If you are running a coffee shop in the Pacific Northwest, then there is going to be a bit of competition around; in Antarctica, less so.  When there is plenty of competition and you price yourself too high, you will lose.  Do resist the temptation to get into the race to the bottom with discounts, however.  Only he with the deepest pockets will win that game.  If you try to cut your margins too close, you could put yourself out of business before you get a chance to capture any market share.

Pricing is both accounting and marketing.  Before you get your small business under way, be mindful of your pricing, and how it will have an impact on your operations and your atmosphere, as well as your bottom line.

What are some special considerations that you have made when setting the pricing for your small business?