Am I charging enough for my products/services?
There is both an art and a science to properly pricing your products or services (let’s refer to both products and services as “products” for ease of conversation). When done properly, pricing is a combination of the costs associated with providing the product and how the market will respond to what you are offering.

The Art of Pricing

Let’s look at the market first. There are two characteristics that will affect what you can charge for your product.

1. The first is whether your product is a commodity or unique. When a product is a commodity, there are not only many sources for the same product, but there is virtually no difference between products purchased from different sources. Commodities have very poor pricing power, and their providers are typically in a price race to the bottom. The only time this works in favor of a business is when the business also offers a more differentiated product and uses the commodity as a loss leader.

    

To improve your pricing, you must shift your product from being a commodity to something unique through differentiation. Ask yourself these questions:

• Why should customers buy your version of the product rather than someone else’s?
• How are you different from competitors?
• What are the features, advantages, and benefits of your product compared to others?

   

You need to change how customers perceive your product so they see it as distinct from the competition.

1. The second characteristic is the demand for your product. You have very little control over this element. If you find yourself in a market with low demand, ask yourself why that is the case. It may be temporary, but it may not. Being the best buggy whip manufacturer won’t help you sell a lot of whips in a world that no longer needs them.

    

The Science of Pricing

Calculating the cost of providing your product is the science behind pricing.

The first rule is: You must know all of your costs. It is surprising how many business owners have no idea what costs go into providing a product for sale.

Here are a few cost categories:

• Direct Costs, Variable Costs, or Cost of Goods Sold (COGS): These are the costs required to create one item for sale. As sales increase, these costs also increase. Likewise, when sales drop, these costs decrease. Examples include labor to produce the product, materials, and freight.
• Indirect Costs, Fixed Costs, or Overhead Costs: These are costs required to produce your product but do not typically change as sales fluctuate. Examples include administrative and executive wages, rent, insurance, office supplies, software expenses, and utilities (in most cases).
• Margin: While not considered a cost, it is essential to establish your minimum operating margin—the profit you expect to make. Sometimes, the market will not support the margin you expect. If this occurs, you need to reevaluate your business model because it suggests you might be able to make a better profit doing something else.

   

Biggest Mistake in Pricing
What is the biggest mistake I’ve seen business owners make when pricing their products? Not including the cost of their own time and effort. If you don’t expect to be paid, why are you working so hard?