Q&A Pricing is more of an art than a science

Q: My business is doing fairly well, but I’m uncertain if I’ve set my prices correctly. How should I go about determining how much I should charge?

A: That’s a frequent question we get in our business counseling and mentoring at SCORE. And it’s not an easy one for small-business owners to answer. Charging too little or too much may produce the same results: difficulty luring customers, poor cash flow or suspicions about the quality of your work.

Setting a pricing strategy depends on many factors — the kind of product or service you’re offering, your own costs to provide it, your expected profit, your customers’ location, the “going rate” for your industry and others.

Finding the right balance among all the factors involved is more art than science.

A common misstep, especially in the early stages of a business, is pricing too low to attract customers.

While special deals can work in some cases to start the ball rolling, going low is not always the best path.

Low prices can draw customers interested only in price. They are the ones most likely to abandon you the moment they find something lower.

Selecting excessively low pricing levels to attract clients is even more dangerous for service businesses. You only have so many hours to sell. Your business can’t make it up in volume like a retailer who still profits from lower prices if volume is high enough.

Pricing is partly psychological. You will want to set your levels according to the perception of your product or service “brand.”

If you want to be in the premium neighborhood, your pricing can be higher to match an upscale image. Pay attention to “price points,” which are price levels at which a slight increase begins to result in larger decreases in sales.

Pricing is an ongoing process, so test your pricing periodically. You may need to adapt to changing conditions. Competitor prices, your own costs, customer perceptions and your profit expectations can all change.

Research your industry’s norms.

Make sure you use timely and accurate information to calculate your costs for labor, supplies, and direct and indirect overhead for every product or service you offer.

“Guesstimates” may cost you far more than an hour or two of research.

Ron Consolino is a management counselor for SCORE, Counselors to America’s Small Business, a volunteer, nonprofit association and a partner of the U.S. Small Business Association. For information, go to www.scorehouston.org. His column is intended to provide general information. Send your small-business questions to Small Business, Houston Chronicle, P.O. Box 4260, Houston, TX 77210.
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