Pricing Your Product / Service
FastTrac, Kauffman Foundation
The prices you charge are one of the most critical components of your product and service feature set. They’re not just numbers. They tell your customers about the product or service they are buying. They convey the value of the product. They prod customers to buy or not buy. They can support your brand image or make it fuzzy.
Prices affect almost every aspect of your business including your brand image, your sales numbers, your cash flow, your profits, your ability to make investments in business operations, marketing, and even new-product or service development.
How you price your products and services has a direct impact on these six factors:
Sales volume – Sales volume correlates with the prices being charged for products or services. Higher prices often mean lower volume, whereas lower prices generally result in higher volume. Some entrepreneurs can charge more because of additional or perceived benefits of their products or services.
Sales revenue – Prices set for products or services will affect the total revenue projection. If prices increase, sales volume may decrease, causing an associated reduction in total revenue. Products or services priced effectively, however, can increase revenue and profit.
Market share – How products or services are priced and the pricing position of companies will determine their market share. Sometimes, lower pricing can command a higher market share.
Competitive advantage – Pricing plays an important role in how companies create and maintain a competitive advantage in the market. Much of the advantage depends on how competitors price their products or services and how they respond to price variances in the market.
Company image – The prices for products or services create a perceived image in customers’ minds. Customers perceive some companies as the lowest-priced provider while they believe others are the market leader for quality products with high-end margins.
Profitability – Pricing affects companies’ Gross Margin and Net Profit. Aligned with sales volume and revenue, how products or services are priced will determine overall profitability.
© 2006 Ewing Marion Kauffman Foundation. All rights reserved.