One of the biggest decisions you'll make in your business is setting your prices.  Whether you're selling retail/wholesale products, running a membership driven website, own a restaurant, or maybe you're a website designer, setting your prices so that you make the most profit possible should be the goal of every business.

 

Properly making this decision depends on several different factors, but there are five main rules I've learned to start with:

 

1.) Get Your Product At A Low Enough Price To Be Competitive

I wasn't going to includes this rule, then decided to put it first because you can't even set a good price if you're not getting your product cheap enough.  If there are a hundred different companies selling a product for $50 and you can get it wholesale for $40, don't try to sell this product!  What are you going to try and sell it for?  $80?  No one will buy it from you.  Not if a hundred other businesses are selling it for $50.  And if you sell it for $50 like everyone else, you're making only 20% profit on each sale and you probably won't sell that many because of the competition.  You would have to put up $100,000 to make $20,000 profit.  This isn't very good. 

 

I had this problem when I was in my early 20's running one of my first businesses, a table at a flea market.  A wholesale company sold me a couple grand worth of toys that were also on sale at all the major toy stores.  I was the only person in the flea market (no competition) with toys, so I thought I would make a killing!  Instead I sold almost nothing because I got the toys for only 25% less than what the retail stores were selling them for.  I had to lower my prices to match the stores, but that still didn't help because if Toys R Us and some fly by night vendor at a flea market are both selling the toy for $50, who would you buy it from?  That's a no-brainer.  People want to know you're going to still be there if they want to return the product.  If I'm going to compete with Toys R Us from a flea market, I need to get this toy for at least $20 and sell it for $40, undercutting Toys R Us by $10.  Now I can make some money.

 

2.) Lowest Selling Price Doesn't Always Mean You'll Sell More; People Think Price=Quality

I first learned this from a business book that told the story of a man who was selling a series of three instructional video tapes for $24.95 each in a drugstore.  He was selling around 30 a week, which wasn't terrible, but he felt that for the number of people who frequented the store, he should be selling a lot more.  So he bundled up the entire three tape series and sold all three for $29.95 (which now made the tapes roughly $10 each).  The new price was only $5 more for two more tapes.  He figured since they're getting all three for a low price, he should sell at least 100 a week, which would quadruple his profits.  To his surprise, he started selling only 10 a week, 20 less than he was selling when the tapes were individually sold for $24.95 each.  He asked a few customers what they thought about the three tape series and he found out that people perceived it as closeout junk tapes.  They thought they were low price, worthless tapes bundled together and on closeout, because no one wants them.  Wow!  So, the guy started selling them individual again, made a flashier looking cover for them, raised the price to $29.95 each and people started buying 40 tapes a week.  And a $79.95 three tape bundle pack did great too.  By raising the price and making the tapes look more valuable, he greatly increased sales. 

 

Sometimes, many times, people think price equals quality.  So what if you get a product like those tapes for $2?  If you sell it too cheap, people will think it's junk.  Sometimes people want to pay more!