One of the hardest things for a businessperson, whether they are new or seasoned, is determining what to charge for their products and services. Pricing is a critical aspect of running a successful business, and getting it right can mean the difference between thriving or merely surviving.

How to Price Your Goods and Services

Essential Tips for Calculating Costs, Setting Prices, and Highlighting Your Business Strengths

By:Dennis Wilkinson, Former Owner of D&S Awards

(Originally printed in the September/October 2024 issue of Insights.)

One of the hardest things for a businessperson, whether they are new or seasoned, is determining what to charge for their products and services. Pricing is a critical aspect of running a successful business, and getting it right can mean the difference between thriving or merely surviving.

Unfortunately, too many people try to base their prices on what the competition charges rather than what it costs for them to do business. But how can your competitors’ prices tell you anything about what it takes for you to make money? Everyone’s operations are different, their expenses are different, and their goals are different. So instead of looking at what others are doing, spend some time calculating your costs and getting an idea of how much money you need to be making. Once you have that number, you can price your items accordingly.

Below are some tips for calculating your costs and pricing your items.

Know Your Costs

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Your expenses tell you what you need to charge to make money. Start by calculating your monthly operating costs. List every conceivable, but legitimate, expense. Then break those expenses down into one of two categories—fixed or variable. The fixed costs are the easiest to work with since they don’t change. Things like rent and insurance fall under this heading. Variable expenses, on the other hand, are more difficult to deal with since they are constantly changing. Since these costs don’t stay the same from month to month, you need to estimate what they will be. This is best accomplished by establishing a monthly budget for each item in the variable list. Each month, compare the actual cost to the budgeted cost, and adjust your costing system. Eventually, you will be able to set up your budget with a fair degree of accuracy.

Also make sure to factor in incidentals like equipment repairs and replacements. And consider personal things in your own life like a new car or a vacation. If you’re only planning your pricing so you can get by from month to month, then your whole life will be getting by from month to month.

Following are some fixed and variable expenses you may want to consider when calculating your monthly costs.

Fixed Expenses to Consider

• Rent or mortgage
• Property insurance
• Alarms and security
• Auto payment and lease
• Auto insurance
• Internet
• Phone bills
• Equipment payments

Variable Expenses to Consider

• Utilities
• Business license and fees
• Repairs and maintenance
• Office expenses and supplies
• Shop equipment
• Furniture and displays
• Taxes
• Freight and postage
• Advertising and marketing
• Professional fees such as an accountant, bookkeeper, or lawyer
• Website maintenance
• Damaged product and mistakes
• Owner’s compensation
• Savings
• Meals and entertainment
• Gifts
• Travel
• Education
• Toys and fun
• Retirement
• Returned checks or bad debt
• Dues and subscriptions
• Auto repairs and maintenance
• Gas
• License and DMV
• Equipment repairs
• Equipment replacement
• Computer replacement
• Maintenance
• Depreciation
• Interest expense
• Merchant credit card fees
• Wages
• Employee benefits
• Payroll taxes
• Workers’ comp

Calculate Your Worth

You also need to factor in how much you want to work. There are roughly 240 workdays per year (if you take out holidays and 10 vacation days) or about 2,000 hours if you work eight-hour days.

Once you figure out how much you want to work, and you’ve calculated all your monthly expenses, it’s time to do a little more math. Take your monthly profit total, subtract your total monthly expenses, and divide that by the number of days in the month you want to work. How does that number look? Is it what you want to be making? If not, it may be time to increase your prices.

Focus on Service and Quality

Customers who do business with you because of the quality of service first and pricing second are the ones who will stay with you. And those are the customers you ultimately want. Price shoppers who are always trying to get a better deal don’t typically care about quality or service. Lawrence L. Steinmetz, Ph.D., lays out the problems with price shoppers in his book How to Sell at Prices Higher Than Your Competitors. He says that price shoppers forget to pay, tell everyone how little they paid, drive off good customers, won’t buy next time unless the price is too low again, lie to you, and steal from you. If you’re trying to have the lowest prices in town, you’re likely going to attract customers like this. You owe it to yourself to price things high enough to build a profitable business. Don’t try to be a low-price leader.

Here’s another way to consider it: Think back to the last time you went out to a nice restaurant for dinner. Can you remember what you paid for the meal? Can you remember the experience? Was the food good? Was the service to your liking? I’m guessing you can’t remember what you paid, but you probably have a detailed recollection of the experience. All of this is to say that if you compromise price, thus reducing service and quality, you have done your business a great disservice. Months later, the customers will forget the low price and will only complain about the service or quality.

Stick to Your Prices

Establishing a strategy and policy around pricing can be difficult, especially when times are slow or a customer says they can get it cheaper elsewhere. But remember that you are in business to make a profit. If you cut your price to match your competitors’, that comes right out of your pocket. When customers tell me they can get an item or service cheaper somewhere else, I just say, “OK. Have a nice day. Thanks for coming in.” A lot of times, they’re bluffing, or they don’t want to go to another place, so they end up going with my price.

I also don’t recommend offering discounts often. The word gets around when you do that, and then it can get harder to sell things at the full price. And it can be difficult to quote prices on the spot. Make sure all items and services have clear pricing. This will help you stick to that pricing.

Highlight Your Strengths

Just because you’re not the cheapest doesn’t mean you can’t be competitive. Find what makes your business special and capitalize on that. Maybe you can offer quicker turnarounds than your competitors or better quality. Maybe you specialize in something that no one else in your area does.

Ultimately, by leaning into your unique strengths, you can justify your pricing and attract a customer base that values what you offer. Instead of competing on price alone, compete on the unique value you bring to the table. This approach not only helps in maintaining healthy profit margins but also builds a loyal customer base that appreciates and supports your business for its distinctive qualities.

It's unwise to pay too much, but it's unwise to pay too little, too.
When you pay too much, you lose a little money ... that is all.
When you pay too little, you sometimes lose everything because the thing bought was incapable of doing the thing it was bought to do.
The common law of business balance prohibits paying a little and getting a lot.
It can't be done.
If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better.
— John Ruskin

Dennis Wilkinson has more than 33 years of experience in the awards and personalization industry. He founded D&S Awards in Santa Rosa, California, in 1991, selling it earlier this year. He has played an integral role in APA for more than three decades. Today, he continues to work at the business he founded.