The goal of business is to make a profit. Many small businesses fail at this because they don’t know how to price their products or services, but pricing is the critical element to achieving a profit, a factor that all firms can control.
If you’re a startup or are revisiting your pricing strategy, here are some suggestions from industry experts and small business owners to help you get the price right.
1) Understand service costs and their impact on pricing
Every service has different costs. Many small service firms fail to analyze their services’ total cost and thus fail to price them profitably. By analyzing the cost of each service, prices can be set to maximize profits and eliminate unprofitable services.
The Iowa Small Business Development Center offers a useful cheat sheet on How To Price Your Products and Services, which includes tips for analyzing your total costs. Components to understand and analyze are:
- Material costs
- Labor costs, including, but salaries plus benefits
- Overhead costs. Any cost not readily identifiable with a particular product is overhead. Taxes, rent, insurance, marketing and transportation are all overhead. Part of the overhead costs must be allocated to each service performed or product produced and must be adjusted annually.