“So, how much do you charge?” It’s a question that strikes terror into the hearts of some new entrepreneurs. It’s tempting to pick a price out of the air that “feels right.” But, that’s not going to set you up for long-term success. You need to know how to set prices for your small business, so you can sell with confidence and grow your business.
Your Ultimate Guide to Small Business Money Management
Small business money management is probably not a phrase that gets you excited to jump out of bed every morning. But, your small business – and the dream it represents – won’t last long if you don’t buckle down and manage the heck out of it. This is your ultimate guide to small business money management, so you can stop avoiding this gross, uncomfortable topic and start growing your business with confidence.
When Learning How To Set Prices For Your Small Business, First You Need To Get Into The Right Mindset 🧠
The idea of asking people for money might make you feel sheepish and uncomfortable – like you’re about to face a firing-squad just for putting yourself out there.
You might just throw out a number and hope that they don’t laugh or walk away.
Setting a price is an important step on your journey to start and grow a business.
But, like everything else, that decision is impacted by our mindset.
Mindset applies to everything you do as an entrepreneur – it drives your thoughts, informs your actions, and impacts your results.
| RELATED: How to Manage Money in Business Always Starts with a Mindset Boost
That’s also true of your Prices.
If we’re feeling fear or anxiety about money, we might set a price that’s too low, leaving money on the table.
If we’re feeling overwhelmed, we might set prices randomly, failing to consider important implications to profit.
When we feel proud and confident about what we’re offering, setting a price is a totally different experience.
You need to shift your mindset – From: asking people for money; To: offering people something of value.
When you do, you put yourself on a more confident footing – it’s a mindset that says what you offer matters, it’s not something you have to shy away from.
You also need to shift your mindset…
From: setting prices based on not wanting to be rejected.
To: setting prices based on knowing your worth and doing your homework.
For that to be true, you have to do the research to set thoughtful prices. And, to do that research, you have to believe in your ability to figure it out.
If this mindset flip is feeling a little challenging for you, consider getting additional support with my workbook to grow essential entrepreneurial skills and habits.
| WORKBOOK: How to Run a Business Successfully with These 3 Essential Entrepreneurial Skills
So, how to set prices for your small business, then?
Raymond Corey, author and Harvard Business School professor, said that: “Pricing is the moment of truth – all of marketing strategy comes to focus on the pricing decision.”
In other words, price communicates something important to consumers.
It should reflect your brand. It needs to be consistent with your strategy. And, because consumers only pay for what they perceive as valuable, it has to be based in reality.
With that in mind, how do you land on the right price?
How to calulate selling price of a product or service
It’s more of an art than a science.
But, there are some important things to keep in mind as you consider how to set prices for your small business.
In this article, we’ll explore 5 specific tactics to help you learn how to price new products – and the same steps apply for how to price a service business.
You’ll need to find a creative mixture of these inputs – my hope is to help you see this problem from multiple angles.
This will help you get started, but for more in-depth support, you might consider working 1:1 with a coach. 😉
Brand Affinity
How might your customers perceive your brand & business?
Competition
How might the other players in your field value themselves?
Suppply & Demand
How do supply and demand impact pricing decisions?
your time
How might you put a value on your time? How & when do you charge?
Cost & Profit
Does the math work? What are your Cost of Goods Sold?
How To Price New Products 01: Brand Identity 👜
This first one is the most important – your brand identity should inform how to set prices for your small business.
How To Calculate Selling Price of a Product? Consider Your Brand
Think through the lens of your customer:
- What consumer segment are you targeting? What’s important to them? What spending habits do they already have?
- What does your brand stand for?
- How do you want consumers to feel when they use your product or service?
- How do you want to position your brand in the market?
Think about the market for handbags: a $47 billion business, globally.
Think about all the brands available to consumers – everything from Target to Gucci.
The prices range drastically, from under $20 to over $2000.
What is Gucci communicating by selling a $2,499 purse? When someone buys that purse, what are they communicating (with their money)?
What do you want your brand to communicate?
| RELATED: How to Make Your Business Stand Out from the Competition Like an Absolute Pro in 3 Steps
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How To Price New Products 02: Competitive Analysis 👀
Look at your competition as you consider how to set prices for your small business.
How To Calculate Selling Price of a Product? Try “Competitive Shopping”
Visit a store or website and start checking prices, but be nonchalant about it. Act casual. Pretend you’re shopping.
As you examine different brands, try to think about what they stand for in the marketplace and how they use their price to differentiate and target specific consumers.
If you need an example, go walk the shampoo aisle, you’ll see dozens of different brands, each with a very different price point.
What are your competitors charging for a similar product or service? What consumer segments are they targeting? How are you different from them?
How To Calculate Selling Price of a Product? Think About Where You Want To Be Relative To Those Competitors
If you’re going head to head with another brand or business, think about where you’re different from them and then decide if you want to charge more than them, less than them, or the same as them.
But, just to be clear, your range of options might not be as wide as the Gucci to Target range example above.
You need to think about who your true peers are in the market. Ask yourself:
- Who is targeting the same customer segment?
- What prices is that specific customer used to seeing?
You might find yourself in that ballpark or you could have a totally different price-point.
At the end of the day, it’s about the story you tell to your consumers. Will they see your price as credible and valuable?
What’s the range of prices in the market today? Where do you want to be?
The same concepts can be applied when figuring out how to price a service business!
Competitive Analysis Case Study
In an interview with Adriana Marroquin, the owner of Wilding Flora, we discussed these ideas in practice. Adriana sells indoor pots and plants, and has a range of plant-based services.
How to set prices for products that can be readily purchased elsewhere?
Plenty of big-box retailers also sell plants locally and she can’t compete with them on price.
So, she doesn’t. how to set prices for products
Her knowledge and expertise create value beyond the retail price of the plant itself. That’s a strategic advantage over her competition – because she can offer something they can’t.
It’s a textbook example of how competitive analysis doesn’t have to end with matching the lowest price in the market.
| RELATED: How to Grow A Thriving Side-Hustle – a 321 Liftoff Small Business Interview with Wilding Flora
How To Price New Products 03: Supply & Demand ↕️
Think about supply and demand as you learn how to set prices for your small business.
How To Calculate Selling Price of a Product? Supply & Demand
Supply is how much of a thing is available to consumers. Demand is how much of that thing consumers want.
In economics, you could plot a supply and demand curve to calculate the equilibrium price of a good or service, assuming perfect competition.
But, the market is highly imperfect, so that’s of little use here. What is relevant, however, is to consider the general impacts of prices on supply and demand.
For example, selling something at a higher price will likely mean you sell less of it and, therefore, you may not need to produce much of it.
The reverse is also true.
Selling something at a lower price might mean you’re able to sell more of it.
Why? It goes back to your desired consumer segment and how they think.
Let’s go back to the handbags example.
Gucci doesn’t expect hoards of customers to come in to buy their high priced items. They just need a handful of people who believe they’re getting something of value.
At Target, they’re counting on the masses coming in and making a purchase.
Who is your product or service intended for? What volume will you expect to sell as a result?
| RELATED: How To See Trade-Offs Like An Entrepreneur
How To Price New Products 04: Valuing Your Time ⏰
So, how to price a service business? Well, all of the above still applies, but there are some additional things to consider. Specifically, the value of your time.
What Is Your Time Worth?
If you’re providing a service to your consumers, you need to put a dollar value on your time.
A quick way to estimate this is to imagine the salary you’d like to have and then divide it out by the hour.
Let’s say, for example, that you want a salary of $400,000 (400,000 / 48 weeks per year, accounting for time off and vacations = $8,334 / 40 hours per work week = $208).
If you’re not comfortable with that number, try thinking of it as a goal and work toward it over time.
You also need to determine how and when that fee is charged.
You could charge a flat fee per service. You could charge by the hour. There are lots of options, but what you choose has to make sense to your consumer.
Competitive analysis can be helpful here as well.
What might your time be worth?
| RELATED: How to Improve Business Performance & Increase Profit with 2 Key Metrics
How To Price New Products 05: Cost & Profit 💰
Profit is essential to consider as you learn how to set prices for products.
Notice that these are last on the list.
Cost and profit are essential to consider when determining your price, but they are secondary to having a deep understanding of your consumer – their needs, wants, and what they perceive as valuable.
Still, you need to do the math and ensure every sale is profitable.
To do that, you might want to conduct a brief business financial health check-up.
FREE CHECKLIST: You Absolutely Need This Simple Business Financial Health Checklist
At minimum, you need to examine your total cost per unit and subtract that from the retail price. When you look at what’s left, is that enough for you?
If not, do the math again and change your variables – what’s the impact on profit if you increase prices? Or, decrease costs? What would that take?
What profit goal would feel comfortable for you?
You can learn more about how to lower business expenses and how to think about sales vs. profit with these articles:
| RELATED: How to Lower Business Expenses & Increase Profitability with 1 Essential Idea
| RELATED: How to Manage Business Money Starts with the Difference Between Sales & Profit
How to Set Prices For Your Small Business And Feel Confident – Start Here 🤓
Now, how do you know you’ve picked the right price?
There are so many variables to consider as you think about how to set prices for your small business – don’t stress about naming the perfect price.
Select the variables and consideration set that’s right for you. Then, submit to the market.
Test and learn. Let your consumer be your guide. How might the consumer let you know if you hit or missed the mark?
Watch your sales numbers and run little experiments. What happens when you offer a deal or discount? What happens if you add another option at a lower or higher price?
Give yourself permission to adjust your prices rather than setting them in stone.
Price, profitability, costs, and more – it’s a lot to manage! Need some help? Join my Small Business Money Management Email Course.
| COURSE: 4 Amazingly Simple Email Courses For Small Business Owners
Take a moment to pause & reflect.
- What factors seem important as you consider how to price new products or how to price a service business? What additional inputs might you need to really sit down and do the math?
- Make a plan – when will you sit down and figure out how to calculate selling price of a product or service?
Actions, experiments, and things to try next.
Do the work to name your prices. Once you’ve considered the above and collected any relevant data, you should be able to start painting a picture of what a price could look like. So, what price feels right? What would be your ideal price? How do you feel about the price you identified? Is that a price to work toward or a price you can use on Day 1? How much profit does it leave you? Take time to think through the implications of the price you land on.
Write a pricing narrative. Go through the above five tactics and write a brief summary that explains how to set prices for your small business. What did you consider for each tactic? Later, when you’re ready to adjust your prices again, you’ll want a reminder of where the original number came from. And, don’t forget, when you’re ready to re-learn how to calculate selling price of a new product, you can come right back here to the 321 Liftoff blog.
additional tools, links, & downloads.
Start here:
- READ: How to Make a Small Business Profitable with 1 Simple Equation | 321 Liftoff
- READ: The Good-Better-Best Approach to Pricing | HBR
You might also like:
Make a commitment.
Hopefully, you’re leaving with several ideas of what to try next. So, take a moment to aim your effort.
- What’s one thing you’d like to do differently after reading this article?
- What commitment are you willing to make in service of your growth?
- How will you hold yourself accountable?
Questions, comments, or ideas for the blog? Sound off in the comments!
Join the conversation.
What’s been the hardest part about learning how to set prices for your small business?
What ideas or questions does this spark for you? Share some of your reflections in the comments or send me a message.
Starting and growing a business is not a straight line.
It can feel messy – it zigs and zags, it starts and stops. It can feel frustrating even for the most seasoned business owners. And, that’s ok.
It’s also an exciting challenge. It’s going to stretch you. You’re going to learn a lot – not just about business, but about yourself.
And, that’s why it’s worth it.
TAKE THE SPIN OUT OF STARTUP 😵💫🤩
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