Determining how much to charge for a product or service is tricky – price too high and it might not sell, price too low and you aren’t making enough profits. Read how much incorrect pricing really costs.

Determining how much to charge for a product or service is tricky – price too high and it might not sell, price too low and you aren’t making enough profits. Read how much incorrect pricing really costs.

 

How does pricing incorrectly affect your bottom line?

Whether you’re a first-time entrepreneur or you’ve been in business for years, figuring out what to charge for your products and services may seem like a big, ambiguous mystery. Nevertheless, over or under-charging can hurt your business.

If you aren’t charging enough to cover the creation costs and overhead expenses, plus a profit margin, then you aren’t going to be improving your business’ cash flow. If you’re charging too much, customers will go to your competitors and you lose out on a sale.

The secret lies in figuring out through experience how to set prices that attract your target audience and knowing when to adjust them.

Don’t sell yourself short!

Why is underpricing dangerous? Trying to get initial sales and market recognition through low prices right out the door is actually harmful to your business. If you charge too little and learn that you are losing money on that product, raising that price later is going to be even more tricky to retain those customers.

Not only does underpricing your products or services cut into your bottom line, but you should take consumer psychology into account. What this means is that the perception of a cheap product can turn away the customers you hope to attract by lowering prices.

What you really want to do is create the perception of great value for a good deal. Depending on what kind of customer you want to attract, you need to address what makes them feel like they are getting their money’s worth:

  • If you want to be known as a premium product, don’t mention “sale”, “discount”, or “clearance.” Instead, choose words such as “promotion”, “limited time offer”, and “exclusive.”
  • Prices that end with .99 will seem less expensive than a whole number, but ending with .90 is even better. Losing those 9 cents is worth a customer feeling like your product is inexpensive but not cheap.
  • If you want to attract the type of customer who never buys full price, make sure to increase your prices so that you can afford to mark them down frequently, issue regular coupons, and offer special military or student discounts.
  • If you can’t lower your prices to beat a competitor, focus on selling your value and customer service.

Find the magic middle numbers

Take a look at your annual P&L statements to see where you need to charge more and where you could cut back on inventory. If you haven’t created a P&L statement before or haven’t been in business long enough to have yearly records, research online for pricing best practices.

Once you’ve calculated expenses, figured out the how much profit you need to make for growth, looked at your competitors’ prices in the market, and developed a good marketing plan… you’re ready to stamp that price tag and start selling!

 

For information about Opportunity Fund’s small business loans, please contact us at 866-299-8173 or loans@opportunityfund.org.  For questions about your existing loan or other customer service questions, please contact us at 866-299-8173 or sbhelp@opportunityfund.org.

Loans are subject to credit review. Additional documentation may be required for credit approval. We are an Equal Opportunity Lender. Loans will be made or arranged pursuant to California Department of Corporations Finance Lenders License #6050609.


Opportunity Fund is tackling economic inequality so that hard work and perseverance means a shot at getting ahead, not just struggling to get by. Our programs are supported by a community of donors and investors whose contributions help to fund small businesses, support college students, and build stronger families and vibrant neighborhoods. Since 1994, the team has deployed $600 million and helped 20,000 families earn, save and invest in their own futures. Opportunity Fund has earned a 4-star rating from Charity Navigator, America’s largest independent charity evaluator, for our commitment to accountability and transparency.

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