Factors That Determine Price

By: Jennifer Brazer

Jennifer is the author of From Cubicle to Cloud and Founder/CEO of Complete Controller, a pioneering financial services firm that helps entrepreneurs break free of traditional constraints and scale their businesses to new heights.

Fact Checked By: Brittany McMillen

Key Factors That Determine Business Price: An SMB Guide

The key factors that affect business pricing include your costs of goods sold, what your competition is doing, customer demand, how much customers think your product is worth (value perception), your brand’s image, the economy, rules and laws, and smart ways to use psychology in pricing. For small and medium business (SMB) owners, understanding these parts helps you set prices that make you money while keeping customers happy. It’s a big decision! Price too high, and customers might walk away. Price too low, and you won’t make enough profit to help your business grow. Many entrepreneurs struggle with this. They either don’t charge enough or price themselves right out of business. This guide will help you figure out the best price for what you offer.

So, what influences your prices and how does it affect you as an SMB owner?

• Your costs tell you the lowest price you can charge and still make money.
• What your competitors charge gives you an idea of what customers expect.
• How much customers value what you offer shows how much more than your basic costs they might pay.
• Things like the economy or new laws can force you to change your prices, no matter what you planned.

Understanding Your Cost Structure

Knowing your costs is the first step in any smart pricing plan. Before you decide on a price, you need to know exactly what it costs to make your product or offer your service.

Direct costs are things like:

• Materials needed to make your product.
• Wages for workers who directly make the product or do the service.
• Shipping and packaging.
• Fees for processing payments (don’t forget these!).

Indirect costs are just as important:

• Overhead like rent, electricity, and insurance.
• Marketing and ads.
• Salaries for office staff.
• Software and tech costs.

Businesses can actually lose money on some items because they didn’t add up all these costs. For example, a business might find out they were paying almost 4% in credit card fees on items with small profits, which wiped out their earnings on those sales! After a full cost-plus pricing methodology check, they could fix their prices.

Your price also needs to include the profit you want. Most businesses that last aim for at least a 10-15% profit. Without that extra, it’s hard to handle surprises or grow your business.

Analyzing the Competitive Landscape

Your business isn’t alone. You have to look at what your competitors charge for similar things.

You can generally choose one of three spots with your prices:

• Premium pricing: Charge more than others by showing your product is better or has special features.
• Competitive pricing: Charge about the same as others, but compete with great service or by making things easy for customers.
• Economy pricing: Charge less than others but still offer good quality.

Which way to go depends on what makes your business special and who you’re trying to sell to. If you charge more, you need to clearly show why you’re worth it. If you charge less, you need to be sure you can still make a profit. Many small businesses try to beat competitors by just charging less. But price isn’t always why people buy. Sometimes, good quality or service matters more. Using essential marketing strategies to help grow your business can show customers what makes you great, besides your price.

Measuring Customer Value Perception

What customers think your product or service is worth can be more important than your actual costs. This “perceived value” comes from:

• The problems you solve for them.
• The time or money they save.
• Good feelings or making them feel special.
• Less risk or more peace of mind.

Value-based pricing strategies use this idea. You connect your price to the benefit the customer gets, not just your costs. For example, accounting software might not cost much to run, but if it saves a business owner 10 hours of work each month, that’s huge value and means it can have a higher price. Talking to customers about the benefits they get and putting a number on the time or money they save can help show this value.

Responding to Market Demand Dynamics

The old rule of supply and demand is still key for pricing. If lots of people want something and there isn’t much of it, prices go up. If there’s plenty of something but not many people want it, prices go down.

For SMB owners, this means your prices should change with:

• Busy and slow seasons.
• Whether your industry is growing or shrinking.
• Changes in how customers shop.
• Problems getting supplies.

A smart move can be dynamic pricing. For example, a garden store might slightly raise prices on lawn care items right after a rainstorm because that’s when customers are most ready to buy. Even small businesses can use this idea by planning for seasonal changes or offering special deals during slow times.

Aligning Pricing with Brand Positioning

Your price should match your brand. If you’re a luxury brand, low prices can make you look cheap. If you’re a budget brand, high prices won’t work.

Think about it:

• Premium brands: Higher prices match the idea of top quality.
• Value brands: Medium prices show a good mix of quality and cost.
• Budget brands: Low prices get customers who mostly care about saving money.

How you show your prices also matters. Premium brands often have simple, clean pricing. Budget brands might show lots of discounts. Sometimes, changing how a business is seen (its brand positioning) and adjusting prices to match can actually improve customer loyalty if the price better reflects the true value provided.

Navigating Economic and Regulatory Pressures

Some things that affect your prices are outside your control. These include:

• The economy (is it good or bad? Are prices going up everywhere?).
• Industry rules and the costs to follow them.
• Tax laws.
• Problems getting materials or goods.
• Changes in the job market.

If your costs go up because of inflation, you have to decide: do you pay those higher costs yourself, or do you raise your prices? If the economy is slow, selling more might be more important than making a big profit on each item. New rules can also add costs. For example, new data privacy rules might mean you need expensive new software, and that cost has to be part of your pricing. Knowing how to handle things like sales tax and maximizing home business tax benefits is super important. It can stop you from making pricing mistakes that hurt your profits or get you into trouble.

Leveraging Psychological Pricing Strategies

It’s interesting how our brains look at prices! Understanding psychological pricing and consumer behavior can make a real difference.

Here are a few common tricks:

• Charm pricing: Ending prices in 9 or 7 (like $19.99 instead of $20). People often round down!
• Prestige pricing: Using round numbers for fancy items ($500 instead of $499).
• Anchoring: Showing a high-priced item first makes others look cheaper.
• Bundle pricing: Selling a few products together for a slight discount makes it feel like a good deal.

Studies show that using .99 at the end of a price can boost sales. Also, how you show the price matters. Smaller writing for the price, or even taking away the dollar sign, can sometimes make people less focused on the cost. Testing different ways to show prices can reveal that small changes can really add up.

Creating Effective Price Segmentation

Not all customers see value the same way, and not everyone can pay the same price. Price segmentation means you offer different prices to different groups. This helps you sell to more people.

You can group customers by:

• Their size (like a person vs. a big company).
• How much they use your product (light, medium, or heavy users).
• When they buy (early birds vs. last-minute).
• Where they are located.

A good tiered pricing system, like offering Basic, Pro, and Premium plans, lets you get the most from each group. Each level should offer fair value for its price, and it should be easy for customers to see which one is right for them.
Pro Tip: One accounting service increased revenue by 40% by introducing industry-specific pricing tiers, charging higher rates for clients in complex regulatory environments while maintaining competitive rates for simpler businesses. Make sure your higher tiers include everything from the lower ones!

Avoiding Common Pricing Mistakes

Business owners sometimes make the same pricing oopsies over and over:

• Pricing too low because you’re not sure: New owners often don’t feel confident, so they charge too little.
• Forgetting some costs: If you miss indirect costs, you might think you’re making money when you’re not.
• Copying competitor prices without thinking: Your costs and value are unique. Just matching others can be a disaster.
• Not changing prices for too long: If you’re scared to raise prices, rising costs will slowly eat up your profits.
• Too many discounts: If you always have sales, customers will just wait for them, and your regular price won’t seem real.

The biggest mistake? Thinking of pricing as just numbers, not marketing. Your price says a lot about your brand and quality. I once worked with a consultant who tripled her rates and found that not only did she attract better clients, but they actually implemented her recommendations more consistently – the higher price created greater commitment to the process.

Your Pricing Journey: An Ongoing Process

Great pricing isn’t something you do once and forget. It’s a journey that needs regular check-ups. Look at your costs, competitor prices, and what customers are saying at least every three months. This doesn’t mean you change prices that often, but you should always be checking if you need to.

Remember to tell your customers clearly why prices are changing, especially if they’re going up. If they understand it’s because of better value or rising costs, they’re usually okay with it.

Setting the right prices can feel tricky, but by understanding these factors and regularly reviewing your strategy, you can find that sweet spot. Mastering your pricing is a powerful step in your journey as a small or medium-sized business owner, helping you build a strong, profitable business that your customers love and that truly supports your dreams. If you’re looking for more expert advice like this to guide you, visit the team at Complete Controller. You’ve got this!

FAQ 

What are the most important factors when deciding a price?

The most important factors usually include your total costs to make and sell the product (so you make a profit), what your competitors are charging, how much customers are willing to pay based on the value they feel they get, and current market demand.

How do my business costs affect my pricing?

Your costs set the lowest price you can charge without losing money. You need to cover all direct costs (like materials and labor) and indirect costs (like rent and marketing) and then add a profit margin on top to get your final price. If your costs go up, you may need to raise your prices.

Why should I care about my competitors’ prices?

Competitors’ prices give you a benchmark. Customers will often compare your prices to theirs. You don’t always have to match them, but you need to understand how your price and product value compare, so you can explain why your price is fair.

How often should I review my prices?

It’s a good idea to formally review your pricing at least once a quarter. You should especially check them if your costs change a lot, if competitors make big price changes, or if you notice big shifts in customer demand. You might not change them every quarter, but regular reviews help you stay profitable.

How do I set a price for a brand new product?

For a new product, first calculate all your costs. Then, research what similar products sell for. Think about the special value your new product offers – does it solve a problem better or offer unique features? You might start with a special introductory price to get early customers or price it based on the high value it offers from the start. Getting feedback from potential customers can also help.

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