One of the most difficult issues many small business owners face is determining the right price to charge for their services. Pricing your services correctly can enhance your opportunity to sell more and to set the foundation of a successful business. However, pricing your services incorrectly may create problems that are difficult or inevitable to overcome. So how should a business owner determine a price for their services? Do you believe that price should reflect the value that customers are willing to pay, or should prices primarily reflect the cost involved in making the product or service?
We all know that a business can only make an adequate profit when prices of their products and services exceed the cost of production, such as the price of supplies, production costs, labor, educational background and experience. In other words, the more money a company invests in making a product or service, the higher the price for this service will be. However, this concept does not work in a competitive environment. With the increase in competition, business owners are lowering prices to gain a competitive advantage within the marketplace, which increases overall demand. Within the mindset of the customer, they will not pay for an expensive service unless its value exceeds the overall cost.
In any particular marketplace, prices naturally reflect the demand curve, which is the relationship between the price of goods and services and the amount consumers are willing to pay. For example, online educational services such as Udemy have a large consumer base due to its competitive prices, which draws in more customers as their brand increases. Therefore, Udemy’s prices have reflected the value in which consumers are willing to pay, which maintains a consistent flow of transactions from both parties.
On the other hand, too much price decreasing between competitors within the marketplace can create a profit decrease within the overall industry. For example, during the 1992 price wars of the airlines industry, U.S airline carriers competed with one another by lowering its fairs and making it cheaper to fly. This war caused an increased of consumers purchasing fairs but decreased in overall profits, costing the airline industry more money to maintain this high level of operations without any beneficial cash flow from consumers. In addition, production costs were too high and did not create a balance within the demand curve.
With that said, I believe that pricing should reflect various factors, such as the target consumer, competitors’ price and overall quality of service. As difficult as it may be for business owners to create a value for their services, it is also essential for them to create a competitive price that enables them be profitable in the marketplace.
In your opinion, does market demand also affect consulting services, where one’s industry experience and educational background determines its overall price? Or should price reflect what customers are willing to pay?