Pricing for profitability is paramount to your survival as a new business. It is generally not advisable to price below your costs in order to gain market share. It is critical, therefore, that you understand your own internal cost structure and that you price your products or services at a level that not only covers your costs but also generates a profit for your firm.

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Understanding your cost structure is not enough, however. A businesses price strategy will not be determined by its cost structure. Ultimately, a firm's pricing strategy will be determined by the market itself. The price you charge for your products or services should be consistent with what the market will bear.

If customers are generally unwilling to pay you a price which covers your costs, then you must find a way to reduce your cost structure to bring it in line with the cost structure of those businesses which are operating profitably in your market. If you fail to bring your costs into line with those of your more frugal competitors, then you will be forced out of business.

In economic terms, most firms are considered "price takers". That is to say that most businesses - and particularly small businesses, must go into the market and "take" whatever price is given them. In other words, they have no control or influence over general market prices. There are very few businesses that are large enough to influence market prices. As a general rule, the only thing that a small business can control is its internal cost structure. It is incumbent, therefore, on you as a small business owner to understand and manage your firm's costs to ensure profitability given market price levels.

Prices for similar or identical products or services will often vary rather dramatically from city to city and state to state. It will be important, therefore, that you conduct a thorough investigation in your market to determine the competitive price range for your product or service. If you will be selling nationally you should use the prices that other national companies are asking for similar products as a benchmark for your own pricing strategy.

The Internet can be a rich source of national pricing information. Be aware, however, that many companies selling products on the Internet will be pricing at or near cost in order to establish a market position. If you intend to sell to a local or regional market you will be better served to benchmark against local and regional competition. While competitive pricing information is not always readily available, you will be surprised at the amount of information you will be able to uncover with a little work and creativity.

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In the retail and wholesale industries there are well-established markup guidelines. Suggested wholesale and retail markup information can often be obtained from manufacturers, wholesalers or other suppliers. Monitoring the in-store and advertised pricing activities of your competitors will yield similar pricing intelligence.

"Value" of course embodies the concepts of quality and price. For most products and services there is an implicit tradeoff between quality and price. As the quality of your product or service declines relative to that of competitive offerings, your price must be commensurately reduced in order to satisfy a customer's "value" requirement.

Conversely, if you are capable of providing superior quality, you should expect to be able to charge a higher price than your competitors without violating the "value contract" with your customers.

At some point, however, the relationship between quality and price becomes non-linear. That is, there will generally be a point where, for any given product or service, price considerations will begin to override quality considerations. A declining tradeoff between value and price will be observed, such that incremental quality improvements become less valuable in the eyes of prospective consumers.

Developing initial target prices will take a good deal of effort. In the early stages of your business, much of your price intelligence will come to you through the trial and error process of market interaction. As you begin to deal with potential customers, you will quickly develop a sense of average price thresholds for your market area.

Your ultimate objective should be to establish a price structure that attracts customers while generating an adequate profit for your firm. Pricing should be viewed as a continuous process. Once you feel satisfied that you have established an optimal price structure you should continue to periodically review your prices and benchmark them against the competition to ensure that you are always in touch with the market. Do not assume that prices will remain constant. It is not unusual to see significant price swings (either up or down) in a market over time. The price you charged last year may no longer be appropriate this year.

As a general rule, do not expect prices to move in lockstep with inflation. The fact that the Consumer Price Index (CPI) goes up 3-4% does not necessarily give you license to raise your prices by a similar percentage. Competitive pressures generally constrain such actions. At the very least there is usually a lag effect. On the other hand, you should not feel unjustified in scheduling periodic price increases if you believe they are warranted. Let prudence guide your decisions. It is usually easier to establish a higher price level on new business than to initiate an across the board price increase on existing customers (regardless of how justified).

When a current or prospective customer requests a product modification or a special service which goes beyond what you consider to be "normal" you will have to determine whether you will charge a premium for the extra measure of service you will be providing.

If the client is large and the volume of business is significant, you may decide that some extra service is justified. Likewise, if competition for the account is keen, you may be willing to throw in some additional benefits at no extra cost in order to secure the business.

On the other hand, you do not want to get into the habit of routinely agreeing to product or service exceptions without additional compensation. What may seem like a small request to the client can often mean the difference between operating at a profit and operating at a deficit. You should not feel guilty for charging a little extra for the additional time and effort that will result from a special request.

Unfortunately, there are no really good rules of thumb regarding special requests. Each request must be evaluated individually. Your evaluation must include an assessment of what you feel the extra services will actually cost you. Your calculation should also provide for a normal profit margin.

Pricing is not always an exact science. There will often be a range within which you may comfortably operate. The idea is to develop a sufficient understanding of your customers, your market and your underlying cost structure to be able to derive a price that is in the right ballpark.

Consistently undercharging for products and services is a common problem among small business owners. Charging a fair rate for your time or the time of your employees is generally not sufficient. In addition to the profit margin that your company is entitled, you must not ignore the fixed overhead costs which you incur each month to support your ongoing business activities.

Even if you begin by operating from your home, you will have incremental overhead expenses such as telephone, utilities, automobile, printing and equipment expenses. The price of your services must always include an allocated portion of your fixed overhead expenses.

Additionally, your price must account for all variable costs of providing products or services to your clients.

In developing your price strategy you should always be mindful of your underlying cost structure which consists of the following:

• Variable Costs: All incremental costs of providing services to the specific client (i.e. labor, delivery expenses, materials, payroll taxes, employee benefits, etc.)
• Fixed Overhead Allocation: A fair share of fixed overhead expenses (i.e. rent, utilities, your salary, equipment, other administrative overhead expenses, sales & marketing expenses, etc.)
• Profit Margin:The portion of the total price allocated as a fair profit for your market.

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