How do you arrive at a price for the products and services you sell? While it depends on what industry your business is in, there are only a handful of foundational pricing methods that are useful to know. Here are several of them.
Time and Materials Pricing
Many service-based businesses price based on the time spent performing the service. An attorney usually has an hourly rate. A massage-therapist will charge based on a 50- or 80-minute service. Plumbers charge a minimum fee for the first hour and another rate for subsequent hours. A moving company charges by the hour (they may also charge by truck or have a fuel charge these days).
In some cases, time-based pricing may be loosely tied to the salary level of the person performing the service, but there must be a substantial markup to cover payroll taxes, health insurance, overhead, training, and any materials or tools that are included.
Cost-plus pricing is used in the retail industry where goods purchased from a manufacturer or wholesaler and made available for sale. This method is based on the cost of the item. A common example is keystone pricing, where an item is marked up to twice the purchase price plus one dollar.
Other industries that use cost-plus include groceries and auto dealers.
Market pricing is pricing that is dependent on fluctuating market conditions. Commodities are the best example. Crops, oil and gas, and metals are a few items that are priced by market.
Target pricing is where you start with a price that you feel customers will be willing to pay, then design a service or product around it. It’s most commonly used in the software industry. As an example, let’s say you come up with an idea for a software application that you feel people will pay $49 per month for. You then build a software development and support team around a budget that supports that price.
Value pricing is based on what the client values and will pay for. For projects, it can be based on the client’s expected return on investment. Value pricing is used in internet marketing and for some services and products.
There is a fine line between premium pricing and value pricing. Some luxury brands may be premium-priced with some value pricing thrown in.
Pricing in Real Life
In business, determining a product or service’s price is part math and part art. It can be a combination of two or more of the methods listed above, or a method not listed above. Many factors and considerations should go into your pricing decisions.
One thing we can help with is to determine if your pricing is adequate for the profit margins you want. We can also help with what-ifs. For example, if you raised your price by ten dollars, but demand went down five percent, what would your numbers look like?
Pricing is a skill to pick up, just like selling, running a business, and customer service are skills you need. If we can help you with your pricing process, please reach out any time.