As a small business it’s critical that you make the time to develop a pricing strategy. This isn’t just about picking a number. It’s a strategic process that impacts revenue, customer perception, and overall business success. To develop an effective pricing strategy, you need to balance your revenue goals, costs, and customer expectations.
In my ebook I cover four essential steps to developing your product pricing so you can set competitive prices, cover costs, and maximize profitability.
Four steps to develop your product pricing:
Set your ideal revenue goals
Calculate your costs:a) to acquire/produce your product/serviceb) to deliver the product/service to the buyer
Identify your average buyers’ attitude/relationship to money
Adjust your pricing to cover costs and also appeal to buyers
1. Your Ideal Revenue
When you’re setting your prices, first start with how much money YOU want to make in an ideal scenario. The ideal scenario is one where you’re making consistent sales, to the point that you can estimate your revenue for 3 – 6 months at a time.
Think,
“Every 3 months I want to make X amount of dollars.”
Remember, in the planning stages of your business all your ideas come entirely from your own wants.
This is YOUR business.
How much money do you want to make? How often? Every day, every week, or every month? How much?
Keep in mind these numbers are your dream revenue goals. It’s going to take time and work to hit those numbers consistently. Before that’s possible, you have to set the intention for the goal.
Know what you’re aiming for, so you can determine exactly how to get there.
2. Calculate Your Costs
The second step in your pricing strategy is calculating costs. Ideally, you’ll have very low costs. Many a scammer and thief has this part down. They have zero monetary costs and their entire strategy is based on 100% profits.
Now if you’re selling stolen goods, or dead-end leads, or fake digital goods built on excuses and lies GOOD FOR YOU. You’ll get yours.
Over here, we’re real business people. And we know
put in the time and deliver the goods.
After you decide your ideal revenue goals, figure out how much time and money it takes for you to get your products, and how much you have to spend to deliver them. Add it up!
Acquisition Costs
Add up all the money you have to spend to create/acquire your products. If you’re reselling, this includes whatever you spend on wholesale/bulk inventory orders. If you provide services your acquisition costs are likely $0 but your service does require time and labor. We’ll cover how to price your labor later.
Delivery Costs
Acquiring the goods always costs time or money, and delivering the goods also costs time or money. Get that in your head. You have to invest time or money into your business if you want to succeed.
There are no cheat codes, or shortcuts here. You put in time or you put up bread, or both. And if you don’t wanna, then you drop the business right now because it wasn’t gonna go anywhere anyway.
PAYMENT PROCESSING FEES
Every time a sale is made online, the business is charged a processing fee. This fee comes from the credit card companies and is passed onto the payment processing software companies, who pass the fee on to the business. On average payment processing fees are around 3% + 30cents. Fees may vary by processing company, and it’s up to you to either eat the cost or pass it on in your pricing.
SHIPPING
If you’re selling retail goods chances are you have to ship them to buyers. You can run shipping estimates on the USPS website, or FedEx.
First, know how much your products weigh. Identify your top 3 heaviest items. Then, find the 3 furthest state/shipping locations from you. Run shipping estimates on both USPS AND FEDEX, for each of those locations for your heaviest item. Next, run an estimate for ALL three of your heaviest items to the single furthest shipping location from you.
Now you know your most expensive shipping cost, for sending a large order far away. You also know the costs for different sized orders to various locations.
This knowledge gives you options for the shipping rates on your store. You can offer flat rate shipping on larger orders to encourage more sales, and also cover your costs. You can include shipping calculations in your ecommerce software, and slide the whole shipping cost to the buyer.
3. Consider Buyers’ Money Habits
Who are your ideal buyers? We’ll delve deeper into your buyer’s identity in part 3/4 when we talk Marketing. But for now, a quick overview will do.
Get psychological and surgical about this. Who are your buyers, exactly? Age, sex, location? Education? Employment?
How do your buyers feel about spending money and how do they actually spend money?
Make educated guesses. I promise you have some idea how your potential buyers think about money. If you’re blocked and you can’t make educated guesses, then write a fantasy. Make up an ideal buyer. Go through the following questions:
- First, where does their money come from?
- Are they students, depending on their parents for spending money?
- Are they employed adults?
- Are they wealthy AND cheap?
- Are they low-income but interested in status purchases?
- Are they picky?
- Do they have refined tastes, or will they buy anything that sparkles?
- Do they expect bargains?
- Do your buyers have good relationships with money?
- Do they have positive attitudes about spending money?
- Do they have HIGH expectations?
A safe generalization is that most people want a valuable bargain. They want to feel they’ve gotten something incredible – or necessary – at a steal. They want to feel that they’ve gotten more than they gave.
In an ideal scenario our buyers are discerning, and tasteful. They’re able to immediately see the value in our products and services. Our ideal buyers don’t cringe at our prices because their attitudes toward spending money are matured: when they see something of value, they pay worthy prices.
Eventually, your business will be full of ideal buyers. At the beginning we’re playing the hand we’re dealt, and we’re adapting to the market at our personal entry point: Who are the buyers now? And what prices will work for them?
4. Adjust Your Pricing
Once you’ve created a tentative buyer profile – based on your answers to the questions above – it’s time to fit your pricing to your buyer’s budget, while covering also your costs. Here’s where we adjust.
The bottom line is every product sold MUST earn you more money that it cost you to get and deliver. Say you have an item that costs you $5 to acquire and costs you $5 to ship to state furthest from you. You have to earn more than $10 on that item to make a profit from your store.
Will you offer flat rate shipping on all items, or will you use a shipping calculator to show customers unique shipping rates for their order. The value in flat-rate shipping is that you it encourages buyers to spend more. Also, you can potentially earn more on smaller orders to closer locations, where the customer pays the same rate that covers shipping to further locations.
The value of a shipping calculator is that it automatically sorts out shipping costs per order, giving you room to reasonably mark-up your prices.
So where do you price the item that costs you $5 to acquire? You can price it at $7 and let the shipping calculator set the cost. Or, you can price it at $12 and offer flat-rate shipping. You can price it at $15 and use either shipping calculator of flat-rate shipping exclusively for orders of 3 items or more.
There is no wrong way to price.
Once you’ve already done the prep work of calculating your costs and imagining your buyers’ preferences, you have the freedom to play with your pricing until you find the perfect number.
Some pricing strategies to consider:
- undercutting your competition by $2 or more (whatever is comfortable for you).
- offering DEEP discounts to new e-mail subscribers for their first purchase.
- running a promotion for a lower flat-rate shipping on bulk orders (for a limited time).
Lowering your prices at the very start of your business won’t hurt you if you have a solid marketing strategy and undeniable product presentation. See, how dedicating time your product development pays off. The more you know your product the easier it is to present it as incredibly valuable to buyers.
Consider giving e-mail subscribers special discounts that are actually discounts. Come off the 10% – 15%. Give them exclusive deals like 25% – 30% and encourage them to share coupon codes with friends.
Emails are a direct line to your buyers. USE IT. Ask for reviews & suggestions. Show your appreciation with REAL discounts.
Now that you’ve got your pricing strategy sorted, look back at your ideal revenue goal in step 1. How many sales do you need to make in order to reach your revenue goals? Hold on to this number. It’s going to be the basis of you future marketing plan.
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