Make sure the Price is Right
In your entrepreneurial journey, you will find (or maybe you already have found) a problem that impacts a number of people. Maybe you see a lack of support for foster parents or an issue with learning a foreign language during your busy workday. Whatever it is, let’s assume you’ve done your homework to know there’s a group of people that do, in fact, want this problem to be solved. So, you create a quality solution that could improve the lives of people that are affected by this problem.
But, now you need a price tag. Where do you start?
First, you need to understand that price is based on “perceived value” and not the cost of producing your solution.
Every transaction ever made is an opportunity cost and money gives us a medium to measure and compare that opportunity cost. For example, everyone has a limited amount of disposable income, and when a customer spends $40 on your product, that means they can’t put that $40 toward something else. So, keep in mind that your good needs to be valuable enough that a customer will give up something else that they could have purchased with that same money.
You’ll need to do market research on the cost of other competitors and substitutes. You’ll also want to set up experiments to test what potential customers are willing to pay for your product. As you research, you’ll need to compare this “willingness to pay” against the cost of your product. If you find that people are not willing to pay more than what it costs to produce the good, then you will either have to reduce your costs or rework your solution.
There are quite a few economic articles out there on how to price your experiments and how to maximize your profit. However, here’s a piece of advice that isn’t discussed as often, but is just as imperative to pricing your product (especially as a new business owner): do NOT set a price point before talking it over with a trusted source. I repeat, do not set a price point before talking it over with a trusted source.
Why should you always get a second opinion on your price tag?
My guess is that a lot of you have a tendency to sell yourself short. When you’re struggling to sell, the first thought that comes to your mind is “it’s probably too expensive.” Sometimes you do need to lower your price, but my guess is that 90% of the time, we need to ignore that “knee-jerk” reaction and focus on our sales skills.
Let’s take a look at a few reasons why a second opinion is imperative.
- You’re insecure. You’ve probably asked yourself, “would someone really pay that much for something I designed?” The answer is, yes. First, make sure your product has quality and will deliver on the promises you are making to your customers. After you are confident in that, always go back to the fact that your business is solving a real problem, and therefore is valuable.
- As a Christian or a servant-hearted person, you feel uncomfortable making a profit. You don’t want to overcharge or take advantage of people for your good/service. However, being compensated for your talents and your work is really a beautiful thing. You put in hours of hard work and expertise to create your product and add value to someone’s life. It’s really an exchange of blessings. You are blessing someone else with your product and in return, they are blessing you back. Additionally, don’t forget that your customers have the option (with the exception of very specific markets with no demand elasticity) to say no to your price!
- You’re emotionally tied to your product. This is especially true if you meet with your clients face to face. Maybe your potential clients are asking you for a price reduction or suggesting that the price is high. Yes, once again, sometimes you need to look at the other side of the coin and know when to drop your price. However, your job is to show the customer how your product is solving a problem they have. Chances are, you are the expert in your market, not the customer. Try and help your customer understand how valuable your product is to them by asking meaningful questions or walking them through the benefits of your product.You are passionate about your product and want to get it in the hands of as many people as possible. I get it. You believe that your product can and will change the world, and that might mean more to you than making a profit. You need to be reminded that if everyone is purchasing your product, then you’ve probably priced it too low. It may feel good to never hear a rejection, but in most industries, that is not the best business move.
When you run your price tag by someone else, they can give you a perspective that you just can’t give yourself. For example, one of my best friends creates customized learning materials for marginalized communities. As her friend, I can see the hours of work put into her products and the value she is providing to people all over the world. I won’t let my friend under-value herself. I want her to be compensated fairly for all the value she’s providing, and I will encourage her to stick to the price she knows is right.
As a trusted source for my friend, I don’t need to be an expert in her field to help her price her product fairly. My friend knows what a good market price is, she’s been in the business for years- she just needs the push to do it! Additionally, I can remind her that not everyone needs to buy her product, and if she gets turned down by a few potential customers, well, that’s okay. Most of the time, she just needs some encouragement and someone to keep her accountable.
So, if it’s your first time determining a price for your business, don’t be nervous! You’ll need to make some adjustments over time and that’s alright. Just be sure to run every pricing decision you make by a trusted person! Tag that person below!