How Much Should You Charge?

From About.com: “One of the most difficult, yet important, issues you must decide as an entrepreneur is how much to charge for your product or service. While there is no one single right way to determine your pricing strategy, fortunately there are some guidelines that will help you with your decision.”

This article from about.com reviews both pricing strategy and specific pricing methods you can use to calculate your optimum pricing. Read full article »

• Cost-plus pricing: Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. (…)
• Target return pricing: Set your price to achieve a target return-on-investment (ROI). For example, let’s use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit. (…)
• Value-based pricing: Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is “pay for performance” pricing for services, in which you charge on a variable scale according to the results you achieve. Let’s say that your widget above saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months. However, there is one more major factor that must be considered. (…)
• Psychological pricing: Ultimately, you must take into consideration the consumer’s perception of your price, figuring things like positioning (If you want to be the “low-cost leader”, you must be priced lower than your competition), popular price points (there are certain “price points” (specific prices) at which people become much more willing to buy a certain type of product) and fair pricing (sometimes it simply doesn’t matter what the value of the product is, even if you don’t have any direct competition. There is simply a limit to what consumers perceive as “fair”. (…)

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