Pricing and Fair Value Exchange

Pricing is something that every business owner faces. It is also a recurring issue as your pricing might not always be fixed. It could change in the future as inflation rises or as the market changes. There are however a few principles that could help you when pricing your offering. This article will explore these principles in a bit more detail.

What are the alternatives?

A starting point might be to think through the alternative options that the customer has to compare with your service. The alternative option can also be called a price anchor. Thinking through these options could give you an indication of what a customer might be willing to pay currently.

What is fair?

This is a much more difficult question to answer, but it is also important as new business owners normally undermine the value of what they offer. They do this by offering their product for free or at below market-related prices. By making your product available for free you could negatively influence the market’s perception of your value offering. You could of course do this as part of a larger strategy to lure customers into an exchange of more fair value over the longer term. This will however require careful planning.

What are the costs to aquire your customer?

Many new business owners forget about the costs related to acquiring new customers. These costs involve all the time, effort, and money that you have spent up to and including the first time your customer transacts with you. This is especially true when you are providing an exclusive offering to the market or a product or service that requires educating your client. Your customer will probably not consider the time and effort that you have gone through to get them to transact with you, but this does not mean that it is not important.

What is value?

In most cases when we want to sell something to someone, we think about a price in monetary terms. Consider that in the early stages of your business there might be something else that you can trade. This exchange could give you a perception of the value people have of what you offer. Just keep in mind that trading might make the scaling of your company difficult in the future.

What is the perception you create?

Pricing is mostly built upon perception. When you provide a customer with a price you have a limited opportunity to mold that perception. You will create uncertainty with your customer when your price is lower than the perceived fair value of the offering. The same will happen when your price is unreasonably high. In most cases, the only way to test the perception of the value that you offer is to start selling and seeing the reaction of your customer.

What are your costs?

You will need to recover the costs that you spend. If you are running a larger company and you need to manufacture products you need to recover the costs over the longer term of purchasing assets and acquiring the raw material and other costs that you will spend to sell the goods. If you are running a service-based business, your time and that of your employees are both important. You should consider both of these in your pricing.

You will also need to think through all the overheads that you have. If you are working from home, start to factor these overheads into what you want to make from the beginning. If you are starting out from home you might want to proportion those costs to the area in your house that you will make use of. Consider that you might be renting premises elsewhere and that this also needs to be added to your costs.

What is your margin?

Your profit margin is what you will add to your cost of sales (the costs of your goods) in order to pay for the assets in the business and all the overheads in the business. If your costs could be viewed as the lifeblood of your company, your profit margin could be viewed as the oxygen that sustains you.

Prices can change

As discussed at the beginning of the article prices might not always be fixed. Your pricing might be dependant on who your clients/customers are. You could for instance have a price for a private client and a price for a corporate client. Or you might have a price based on volume. Your price might change based on the number of units that you sell. Your price might also increase with time-based on inflation, or might be dependant on one or two commodities that go into the production of your goods.

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