Setting Prices

One of the biggest obstacles an entrepreneur can face is setting prices for his goods or services. Difficulty in setting prices is experienced not only by startup businesses but also established businesses. The frequent topic with setting prices is risk: risk environment prices too high and you may push potential customers away; risk environment prices too low and you cut business profits.

Due to this pricing paradox most owners turn to discounting. However the risk in most cases can be removed if you have the right information. In general if you know more the less risk you perceive. From that standpoint, pricing is all about getting as much information as you can about your market, your customers and your own internal numbers that drive your profit.

There are no secrets to a successful business, it just takes knowing the right information. When it comes to setting prices, here are some tips to help you avoid mistakes most entrepreneurs make. If you can avoid these, you'll not only be ahead of your competition, but also you'll be ahead of most other businesses.

1. Going too low. Some entrepreneurs set low prices as a strategy. Setting prices that are low will of course increase their top line revenue numbers however they fail to consider their bottom line profit number which is important. An entrepreneur has to profit and price accordingly. You might not get business out of all of your price-conscious consumers, but that is fine. Your competition will--and in doing so they will have to figure out how to profit from the "price shoppers" when there is little or no profit to make.

2. Using the same margin for all items. When setting prices always remember that there is no law stating all products must have the same prices. Keep in mind that slower moving items need higher profit margins. You can afford a smaller margin based on high sales volume. But still you should find ways to add value and increase those margins. Because in the end, even those incremental increases over time will have a huge impact in your bottom line.

3. Not understanding the difference between margin and mark-up. In setting prices these are things you should know margin and markup. Margin is based on the sales price; on the other hand markup is based on the cost. In setting prices most small businesses utilize markup formulas, but many overlook margin. That is a mistake, according to some consultants, since utilizing margin as a tool for analysis helps improve profitability. It is well worth the time for any businessperson to know the difference between margin and markup and how to use both.

4. Doing what others do. Sometimes we set our prices according to the price of competitors. Instead of setting price the same as them why not do a little more research and start to discover and uncover the value you truly offer your customers. Then price for value. IN doing so you will be in the best position to defend your price against competitors with your own “Why list.” Make your customers realize that your price is well worth it.

These are just some mistakes that you should avoid when you are setting prices. Avoiding pricing blunders and being strong in your pricing scheme go hand-in-hand in constructing a profitable business. Master the so-called "pricing paradox" and you will master an area of business in which even the most experienced business people sometimes struggle.