Figuring Out The Pricing Puzzle

November 2011

Kate McGinley, founder of start-up McGinley Media, recently reached a tipping point in starting her mobile website and app creation business. "The trouble is," she writes in a query to Inc. contributor and entrepreneur Norm Brodksy, "I have no idea how to set pricing. My overhead is $7,044 a month, and it takes me about two weeks to develop each website or app. I have one client, a friend of the family, whom I charged $500 for a huge website, which I know was too little, but I'm worried about losing customers by setting my rates too high. Then again, I need to eat. What do you advise?"

"Everything has a price, as the saying goes, but a lot of people struggle with figuring out what the right price is," responds Brodksy. "I get more inquiries about pricing than about any other subject. The classic mistake is the one Kate was about to make: setting a price based on what she feels she needs to earn rather than on how the market values her service. Competition generally determines the price you can charge. So the first step should always be to find out what competitors are charging."

"There are many ways to do that," he continues. "You can call up other providers and—posing as a customer—get estimates. Local, state, or national trade associations may also provide the information you're looking for. If all else fails, you can follow my father's advice, which he gave me in the form of a humorous story: A brand-new optician opens up a store and isn't sure what to charge. On the first day, he gets his first customer, who looks at some glasses and asks how much they cost. 'Uh, $20,' the optician says. '$20?' the customer responds. 'That's all?' 'Well, that's just the frames,' the optician says. 'The lenses are extra.' 'How much?' the customer asks. 'Uh, $15,' the optician says. 'Only $15?' says the customer. 'Per lens,' says the optician. 'Oh,' says the customer. 'So that's $50 altogether.' 'Well, the case is $5 extra,' says the optician. 'Hmm, $55,' says the customer. 'That's a little high, but I'll take it.'"

"I've used this method, and it works. But whatever approach you take, the rule is the same: You don't set the price; the market does. Your job is to determine what the market will pay. Then you can decide whether it's enough to cover your costs and fund your lifestyle," counsels Brodsky. "If you do it the other way—starting with your own financial needs—you're likely to wind up charging too much or too little. And charging too little is even more dangerous than charging too much. If you set your prices too high, you can always just reduce them. But if you undercharge, you develop the wrong kind of reputation. I told Kate, you don't want people saying, 'Let's use Kate McGinley. She's cheap.' It's a lot better if they say, 'Yes, she's a little expensive, but her quality is worth paying for.'"

Source: "Solving the Pricing Riddle," Inc.

Salem Five Resource

When Do You Break Even?

Part of the basis for pricing any product or service is knowing where you get to breakeven. With Salem Five's Breakeven Calculator, you simply input a few core values (variable unit cost, fixed unit cost, expected units sales, and price per unit), and the calculator will generate a complete report showing you the number of units you need to sell to reach your breakeven point.

Learn more about Salem Five's Breakeven Calculator