There are three basic approaches to setting the price of a product or service. Here’s the secret to picking the right one for you.
When it comes to setting price, most people use one of these three ways.
Some people take the cost of producing their product and then they add something extra for a profit.
Other people set their price based on their product’s value to prospective buyers.
Finally, there are people who just charge what everyone else is charging.
So which one of these approaches should you use?
Well, each one of makes sense in its own way.
Your product’s cost to produce it is an important consideration. It sets a lower limit on your price. If you don’t cover your costs, sooner or later you go out of business.
And you can’t ignore your product’s value to potential buyers. It sets an upper limit on what you can charge. Buyers won’t be willing to pay you more for your product than it’s worth to them.
It’s also important to consider what the competition is charging. Buyers won’t pay you more for the same thing everyone else is offering. Competition is like gravity. It pulls your price down to what everyone else is charging.
If each of these approaches make sense, then which one should you pick? The answer is all of them! Here’s how:
First, set your price above your product’s cost to make or buy it. This is where your profit comes from and your ability to feed and sustain your business.
Second, set your price below your product’s value. This is where your customers’ “profit” comes from and their incentive to do business with you.
Finally, set your price with your competition in mind. Give your customers more “bang for the buck.” Either offer them more value for the same price or offer them the same value for a lower price.