We really wanted to do just one big blog post about pricing. But after writing drafts about pricing, we discovered this topic is just too big for one blog post. I mean, between introducing what a price is to the methods of pricing, to discusses way to implement pricing methods and talking about what we think of pricing, it just made sense to expand this topic into a series.
This series is an exploration of pricing the stuff your business sells. We’ll cover what a price is, the different methods of pricing, and then we’ll dive into each method along with the pros and cons of each. We’ll wrap up the series with our favorite method of pricing and how you can apply in your business.
Pricing is one of the more difficult business processes every entrepreneur has to deal with. Some pricing experts will say that pricing is more art than science and others will say it’s more science than art. But the question every entrepreneur wants to know is if their pricing is right for their market.
The simple answer to this question is that if your prices cover all costs and leaves room for profit it is a viable price. However, that doesn’t answer how to establish your price, if you priced too high, or what to do if you price doesn’t cover your costs.
What is a price
Everyone understands that price is what someone pays for a good or service, but it’s so much more than that. It’s a communication tool. Price indicates value and value is what determines if someone will but something. Now, what is hard is that value isn’t some sort of objective thing that can be defined for everyone. The value someone gets out of a good or service is different or everyone. But one thing always remains, the buyer is willing to give up their money because that good or service is more valuable to them than the money they are giving up for that good or service. The goal of the price is to maximize the value the buyer receives while maximizing the money the seller receives.
Methods of pricing
Now comes the hard part…how to set your prices. There are 3 primary methods for pricing:
– Cost-plus pricing
– Market-based pricing
– Value pricing
There are more than this but for most businesses these are the primary methods to set a price. We’ll dig into each one of these, discuss the pros and cons, and at the end I’ll explain why value pricing is the best pricing method.
The most important thing to remember with all pricing, your price justifies your costs. What this means is that your price allows you to use the costs that you incur to produce your product without losing money.
In the next post we’ll start our dive into the methods of pricing. First up will be Cost-plus Pricing, followed by Market-based Pricing, and we’ll finish up the methods with Value Pricing. We’ll then finalize the series with our favorite pricing method and a way to apply it to your business.