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Fidelity Business Blog: Post

3 Mistakes to Avoid When Pricing Your Product

  • Posted July 20, 2021

It may be a delicate balancing act when setting prices for your product and services. If you price too high, you may lose business to a competitor. However, if you price too low, you may end up pricing yourself out of business as well. When you’re able to price correctly, the reward involves maximum profits and long-term success.

One way to help you set the right price is recognizing what the missteps are when it comes to setting prices. Find out how to get your pricing right by avoiding the following blunders:

Mistake 1: Lack of Understanding With Your Operating Costs
If you don’t know your operating costs, you’re likely to fail at pricing successfully as you need to know what should be covered. The key is to be thorough. Consider everything from materials to employee salaries. This checklist from SmallBusiness Cron may be helpful.
Don’t forget to include how much profit you expect to generate when considering operating costs. When you treat your profit as a fixed cost, such as rent or utilities, you’re also factoring success right into your pricing.

Mistake 2: Ignorance About Your Market (And Where Your Business Belongs)
Before you determine your pricing strategy, it’s recommended that you know where your business fits in the market you’re in. For example, let's say that you’re a furniture wholesaler, are you looking to undercut retailers in that area? Or are you in the business of being a commodity provider that responds to the market leader?

By understanding where you fit in the market, you’ll be able to recognize the right pricing model for your products and services. To help you figure it out, the U.S. Small Business Administration (SBA) has a few insights to share.

Mistake 3: Choosing the Wrong Pricing Model For Your Business
After you determine your operational costs and grasp the dynamics of the market you’re in, be careful with this next step. Deciding what the correct pricing model for your business comes next. If you select the wrong model, you may risk revenue loss and unsatisfied customers. To help you choose wisely, take a look at these four basic models:

  • Competitive Pricing – This pricing model entails a lot of knowledge of what others in your market are charging. Armed with that information, you can then determine what pricing to set – the same, higher, or lower. You’ll need to constantly monitor the market to achieve success.
  • Cost Plus Pricing – This means the total amount of your operating costs, plus profit. For example, if the materials, labor, and overhead for your product is $150 and you’d like to get a 25% profit, the cost-plus price is $187.50 ($150 x .25 + 150).
  • Demand Pricing – In this instance, you decide what volume and price produces the ideal profit for your business. Usually, this is performed with a commodity product that is sold through a variety of channels. For example, wholesalers may decide to charge less for a mattress but counter it with the number sold. Retailers could charge more, but offer added services, such as delivery.
  • Markup Pricing – For this pricing model, your business determines the amount to add to the price after all costs are accounted for. This markup is entirely profit, which allows the seller the room to negotiate with a customer looking for a discount.

After you choose the best pricing method for your business, monitor your profits. If things are going as planned, stick with it. However, if it doesn’t, don’t hesitate to make the appropriate changes or go back to the beginning and reexamine operating costs. For many businesses, the details are what matters when it comes to setting the right price or the wrong one.

Setting the right price for your business can be tricky, which makes it easy to make mistakes. By recognizing these missteps, you’re able to better protect your business and set it up for success.

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