The Right Way to Price Your Products or Services

Pricing your products or services is not unlike threading a needle — to find the opening, your prices need to be just so. Aim too high, and you will miss the mark and scare off customers. Aim too low and you will miss again and lose money. The key is finding that perfect sweet spot right down the middle.

Example: My dad was truly a great entrepreneur, taking a single carpet store in Southern California and turning it into the biggest chain in the state at that time. Yet, while he was a savvy businessman, he struggled with pricing.

Dad once launched a city-wide billboard campaign with the slogan, “Carpet World — Elegance Underfoot.” Hundreds of thousands of cars drove by those freeway billboards every day. But the thing was, Carpet World was not an “elegant” place, it was a discount carpet warehouse. Dad figured people would be happy to find low, low prices.

But, and probably not surprisingly, the campaign fizzled. People who saw the billboards and who came to Carpet World were disappointed, not by the prices, but because they were expecting a nicer store. The brand and prices and store were a mismatch.

The moral of the story is that to work, your pricing must align with your brand as well as with customer expectations. Walmart can’t get away with charging premium prices, and Rolls Royce customers would be insulted with a discount car.

Here’s how to find the magic zone of pricing that is just right.

Table of Contents

Toggle

Why a Business Credit Card Could Transform Your Small Business

These business credit cards that offer a convenient and efficient way to separate personal and business expenses, simplifying accounting and tax reporting.

Additionally, business cards can provide valuable perks such as rewards points, cashback, and expense tracking tools, enhancing financial management and the potential to help save money in the long run.

Ink Business Unlimited® Credit Card		Earn $750 bonus cash back Circle with letter I in it. Earn $750 bonus cash back after you spend $6,000 on purchases in the first 3 months from account opening.	Earn unlimited 1.5% cash back on every purchase Circle with letter I in it. Earn unlimited 1.5% cash back on every purchase made for your business	Intro: Circle with letter I in it. 0% Intro APR on Purchases Purchases: 0% Intro APR on Purchases, 12 months Balance Transfers: N/A Regular: 18.49% – 24.49% Variable
Ink Business Cash® Credit Card		Earn up to $750 bonus cash back Circle with letter I in it. Earn $350 when you spend $3,000 on purchases in the first three months and an additional $400 when you spend $6,000 on purchases in the first six months after account opening.	Earn 5% cash back in select business categories Circle with letter I in it. Earn 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year. Earn 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year. Earn 1% cash back on all other card purchases with no limit to the amount you can earn.	Intro: Circle with letter I in it. 0% Intro APR on Purchases Purchases: 0% Intro APR on Purchases, 12 months Balance Transfers: N/A Regular: 18.49% – 24.49% Variable

Step 1: Define your brand identity

Is your brand one of luxury or value? Are you a Nordstrom or a Costco? Knowing the answer is the first step in guiding your pricing decisions. If you’re positioning your business as a premium brand, then you will set your prices accordingly. If you’re focusing on value, your prices will need to reflect that, too.

I recall reading a story about the very early days of Microsoft, when the company got the contract to install the DOS operating system on IBM’s first personal computers. Bill Gates and Co. didn’t really know what to charge IBM for the system. Should they charge over or under six figures?

Gates decided that big companies, like the company nascent Microsoft longed to be, have no problem charging more than $100,000 for a quality product, so that is what Microsoft went with. And as such, maybe it’s no surprise that Microsoft became one of the world’s most valuable companies not many years thereafter (it recently became the second business ever to top $3 trillion in valuation).

Pricing sets the tone and is a big part of your brand identity.

Step 2: Think like one of your customers

Pricing isn’t just about numbers, it is also about psychology. Different price points send different messages, and how your customers perceive those prices can make or break your sales. For instance:

• Prices ending in 9 ($299.99 for example) suggest a deal and attract budget-conscious shoppers.
• Round numbers ($600 instead of $599) imply higher quality and thereby justify higher prices in the customer’s mind.

So, think about what you want your price to say about your product or service.

Step 3: Know your numbers

Before setting your price, you need to know your costs inside and out. You cannot set a price below your costs, and you also need to build in profit. So analyze what it costs to produce, market, and deliver your product or service.

This is called your Cost of Goods Sold (COGS), and it includes everything from raw materials to labor to shipping. Your price must cover these costs — and then some.

Step 4: Choose the right pricing strategy

Once you’ve nailed down your costs and brand identity, then it’s time to choose an actual pricing strategy. Essentially, you have three options.

1. Premium pricing: If you want to establish your product and business as top tier, price products higher. Yes, you will sell fewer items, but each sale will bring in more profit.
2. Value pricing: This is where most small businesses find their groove. It’s about hitting that “just right” spot that feels fair to customers and keeps you competitive in the market. Here, you are not trying to be the cheapest, just a good value.
3. Economy pricing: This approach is all about volume. Sell more units at a lower price, and make up for thinner margins with higher sales. It works amazingly well for brands like Walmart and McDonald’s. But the question for you is, can you get enough sales to make it work for you?

Step 5: Trust, but verify

Pricing should not be a one-and-done deal. Start with your best estimate, but be ready to tweak it as you see how customers respond. Sometimes the market will surprise you, so it’s essential to stay flexible.

The thing to remember is that pricing is part art, part science, part guessing, and part analysis. That said, with the right approach, you too can find that sweet spot where customers feel they’re getting a fair deal, and your business stays profitable.