Teenbusiness.com > Entrepreneurs > Business Plans > Pricing Your Product

Sue Hansen’s approach to pricing her product was to look for T- shirts at the local mall similar to the ones she was selling. As I said earlier, she found inferior products for $14 a piece and then decided to price her own T–shirts at $10. Sue priced them so low because she felt that people, especially students, would not be willing to pay more than $10 for T–shirts—no matter the quality of the artwork. It is my opinion that young entrepreneurs should never lowball the prices of their products or services.

There are basically three approaches young entrepreneurs take in setting their prices: 1) using competitors’ prices as a benchmark, 2) tacking on the desired profit per item to the the amount it costs them to make their products or offer their services, or 3) considering both the competitors’ prices and cost per item (i.e. a combination of 1 and 2).

Using the competitors’ prices as a benchmark is a respectable way to price products or services. young entrepreneurs can use this method by first checking the competitors’ prices and then adding or subtracting money from these prices, depending on how their products or services differ from the competitors’ products or services. The only problem with this method is that young entrepreneurs may not be able to find products or services that are comparable to what they want to offer customers. For unique businesses, there certainly will be no competitors young entrepreneurs can use as benchmarks for determining what they should charge. Even if they offer products or services that are slightly better than their competitors, they are faced with the task of tacking on the extra amount they should charge (or deduct) to adjust for the product or service differences. For example, if a young entrepreneur starts a house-cleaning business in which he cleans windows and his competitors do not handle windows, he will have to figure out what to charge the customers for the extra service. This is not an impossible task, but it complicates matters a bit.

Adding on a profit figure to the cost per item is also used by many entrepreneurs to figure out the prices they should charge. If, for example, Sue Hansen of SportsTees wanted to make $10 profit for every T–shirt she painted, she would have to add $10 to her expense per shirt figure of $4.90 for a total of $14.90. The problem with this method of pricing is that the desire to make a specified level of profit does not necessarily mean that customers will pay the prices set for the products or services. If Sue had marked up her SportsTees to $14.90, it is possible that the price would have been out of range for most of the students in her school.

The proper way for young entrepreneurs to price their goods is a combination of the two methods just described. Here are instructions young entrepreneurs should follow to price their products or services:

1) Calculate the costs per item produced or cost per service rendered.

2) Find out the competitors’ prices. In addition, they should compare the quality of their products or services with their competitors’.

3) If young entrepreneurs’ products or services are exactly like those of the competitors, they will have little choice but to price like the competitors. If young entrepreneurs subtract their expenses per item from this price and get a negative number, they should not go into the business. They should try something else.

4) If their products are slightly different from those of the competitors, they should probably use the competitors’ prices as a benchmark and then make appropriate adjustments to reflect the differences in quality.

If young entrepreneurs have a completely new product or service, they must set their prices above their costs. How far they can set their prices above cost is the million–dollar question. young entrepreneurs can start off by adding a modest amount to the cost depending on how much time it takes them to create the products or render the services. One way to determine this amount is for young entrepreneurs to decide what they would like to earn on an hourly basis. Of course they will have to keep in mind that the minimum wage is $4.25 per hour. If they want to make $6 per hour, for example, and it takes them one hour to make their product or render their service, then they should add $6.00 to the cost per item. Of course, the possibility exists that customers will not be willing to pay such prices. In that case, young entrepreneurs should probably lower their prices to attract more customers.

One more word about new products or services: because there are no price benchmarks, young entrepreneurs have to experiment a little with prices. They should adjust their prices upward or downward to see if they can take in more profit. They may be surprised to find out that if they increase prices, they will make more money. On the other hand, it is possible that if they decrease prices, they will make more money.