This was scanned from an old small business book I had from ATT.
Sorry for the formating.
Guidelines on Determining Prices for Products and Services Price setting is where a new business owner's insecurities surface. Most entrepreneurs set their prices too low. Worried about making sales, some entrepreneurs set their prices according to what their competitors are charging, some add a mere "reasonable" profit to costs and some cut prices nearly to the bone in the hope of attracting a great volume of sales. None of these are methods for a new business owner to emulate for two critical reasons: because setting prices too low may cause customers to assume your products are inferior to the competition; and because you may not be able to survive long enough to compete with more established business that are in a position to set their prices low. How, then, should you go about determining the right price for your products and services? • First, determine your costs. • Second, choose a pricing strategy. • Third, convince yourself to act with confidence, patience and pride and aim high because when you set a price, you also set an image for your company. Determining Costs and Price To estimate costs, you need to tally three factors: • material costs, such as parts and supplies; • labor costs, which should include hourly wages plus benefits; and • overhead costs, or the indirect costs of everything else, such as clerical and janitorial expenses, taxes, depreciation and so on. To estimate pricing, or costs plus profit, you have three pricing strategies to choose from. Comparable pricing Setting a price close to your competitor's price works only when both firms are established. When you are the new business on the block, comparable pricing will not give your competitor's customers any reason to switch to you. Low pricing As discussed above, in most cases, this is a fatal mistake. High pricing The best option for a new small busness, high pricing reflects an image of quality, distinguishes you from your competitor and helps you recover start-up costs quickly. Two other options Another way to price your products is by what is referred to as good-better-best pricing. This gives customers choices within the same product line. One offers the best price, one the best value and one the best quality. You also might consider promotional -pricing, by setting one price below cost to attract sales of other goods; or discounted pricing, such "2/10, net 30," which gives customers a 2 percent discount if they pay within 10 days and, otherwise, requires them to pay the full amount within 30 days. But whatever you do, aim high. You can always drop a price and win customers. It's far more difficult to raise a price and keep them.
"and because you may not be able to survive long enough to compete with more established business that are in a position to set their prices low."
But then it says:
"Low pricing As discussed above, in most cases, this is a fatal mistake. High pricing The best option for a new small busness, high pricing reflects an image of quality, distinguishes you from your competitor and helps you recover start-up costs quickly."""
And then finally:
"You can always drop a price and win customers. It's far more difficult to raise a price and keep them.""
I am not sure the author knows what to do here...
I do agree with:
1. Determine your costs 2. Pricing strategy 3. Act with confidence But he left out determining your customer base...I can only sumize that this is not important to the author.
What he is saying, is, after you determine your costs, then choose a pricing strategy, you may not be able to lower your price, depending on your costs, then you need to change your strategy, remember your overhead and operating costs are fixed, the competor does not have, increased start up costs, and he will have an established customer base.
"Always the low price" may work if you're Wal-Mart; for the rest of us, its' suicide.
If the 'going rate' is somewhers between $800 and $100, there might be room for you near $800- but I doubt it. Down at the bottom of the range, there is no room for errors or complications; below that range, you're in danger of subsidizing your customer. Go much below that, and folks will wonder what you're leaving out. We've all seen the tire ads for $30 tires. By the time they finish adding all their charges for mounting, balancing, disposal, etc....they're no cheaper then, or even a bit higher than, the guy who gave you the "$80 and out the door" price.
You have three things you can sell: price, service, and quality. Sell on price, and you cheapen your work- you make it a commodity. You are saying, in effect, you're no different or any better than the next guy.
At the upper end of the range, customers are going to expect more....things like service tomorrow (rather than three weeks from now); that you fix your sheetrock holes and clean up your mess; and that you don't look like some street-person working out of the trunk of your car.
Just as not all contractors are identical, neither are customers. Save your "sharp pencil" for the guys who are prooven good customers; that is, they produce repeat, steady business, and pay promptly.
IMHO a low-price strategy lacks imagination. Most businesses that use it have to offer minimal services. Many use dishonest practices such as not honoring their warranties, substituting cheap materials, or the worst---intentionally leaving something out of the contract & adding it later as a highly inflated change.
Over the past twenty years I have increased my charges several times. I always have fears that I'll lose clients. What I found in every case was that I kept my best clients and lost a few that were more trouble than they were worth. I also gained new clients that were better for my business.
At the same time I'm continually wondering how I can improve the level of service I provide and the quality of installation. I also look for ways to improve efficiency to increase profits. I provide this service at a fair price, but it will only be a low price if I'm bidding with other top-quality, top-service companies.