Price, Cost, Value: Setting prices that reflect
Setting prices in business requires an understanding of the cost, value, and competition. For many, pricing products is a matter of establishing a fair markup above the cost to the business. The markup will cover all costs related to selling the product and a profit margin.
However, pricing a service or product that is created rather than purchased requires a different process. Rather than pricing based on the cost of the product, you might choose to price based on time and knowledge criteria. Set the value of your time and estimate the time required. Additionally, the value of your knowledge adds to the cost.
Keep in mind that the knowledge that you share with your customers increases the value of your products, whether services or purchased products. This added value shows as advertising and customer relations. However, the expertise you possess also increases the value of your products and services.
Read: Reinventing Retail
Setting Prices
Groomers use this service model in establishing prices. While space, supplies and equipment factor into the costs, the real price reflects the cost of the groomer learning his or her trade. Further, a good groomer keeps updated on trends, new techniques, and new products. This knowledge, critical to professional groomers, takes time and money to accrue.
Pet owners may purchase the needed supplies for the cost of a few grooms. Most soon learn that the clippers do not produce that finished look by themselves. With practice, pet owners may learn to groom their own pet sufficiently. Should they then offer to trim friends’ dogs for half that of the professional? If they groom their own terrier mix, grooming the neighbor’s poodle should be simple.
Many professionals have heard these stories as they try to correct a bad trim done by a well-meaning friend. These people have the best of intentions. But the professional groomer benefits from training and experience.
Aquariums need maintenance
Similarly, stores that offer aquarium maintenance offer more than water changes and chemical balancing. They have experience and knowledge that allows them to maintain a beautifully balanced tank. Often, the professional will see a problem just beginning to develop and resolve it before it becomes serious.
The professional advantage in aquarium maintenance becomes quite evident with commercial tanks. While a doctor’s office with a 100-gallon salt tank might have an employee that has a 20-gallon freshwater tank at home, hiring a professional provides many advantages. Different tanks, different fish, even if both are freshwater or saltwater, creates different needs. Further, the employee may not have the knowledge to find problems in the early stages. Thus, most businesses with aquariums utilize a professional aquarium maintenance service.
Value of knowledge and expertise
Knowing the value of knowledge and expertise allows for setting fair prices. Your electrician charges more per hour than it would cost you to do it yourself. However, he knows which wires to connect and what it takes to pass the building inspection. You are paying for his training and knowledge, not just the wires he connects.
Your time has value
A doctor with several years experience earns many times that per hour compared to a tech with one month of training. The doctor’s fees far outweigh those of the tech and should. Similarly, your time and expertise create added value in your price structure. Setting prices according to your experience shows your customers you hold value.
Setting prices by the competition
While there is a great deal of variation in estimating the value of your expertise, your competition might offer some advice. Most groomers evaluate their pricing according to the going rate in their area. These prices might be adjusted up or down, based on location, level of experience, and demand. Consider the competition as a starting point when setting prices.
A word of caution is due, too. Pricing wars might help short term, but over time they actually serve no one. Your competition might have more or less experience, higher or lower overhead, or other variation. Competitor pricing is useful as one tool, but should not be the only criteria.
Too low? Too high? Setting prices that are just right!
Finding that perfect value of your knowledge may prove quite challenging. Many choose to decide what an hour of their time is worth and then break down the job by the hour at that rate. For instance, if you aim for $35 per hour and the groom will take about 2 hours, the price is set at $70. Of course, most groomers also adjust for matted coats, parasite issues, and difficult dogs, but the hourly rate offers a base.
When calculating your costs, include the costs of tools and supplies, fixed costs such as rent, as well as any travel costs. Be realistic in all pricing. If you set your prices too high, you may lack business. However, setting prices too low is often worse. You may have more than enough customers but might not cover your expenses. Also, burnout becomes an issue when business owners earn lower wages.
Pricing products based on costs needs to include your knowledge and expertise. In many cases, this expertise offers value well beyond the physical product itself. Additionally, ensure that you stay up-to-date on the subjects. Your knowledge provides confidence to your customers and ensures repeat business, as well as customer referrals.
Above all, don’t undervalue yourself and your products. Customers will pay a bit more for a quality product or service. Provide quality, knowledge, and value. Your customers will appreciate the skill and knowledge you offer. Their friends will soon, too.
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