With any business, you must define your target market as a first course of action, before you can set your price and start to sell. “Everyone” is never a correct niche market, no matter how useful your product of service is. It’s too broad and highly inaccurate.
If your target market is too small, you may need to broaden your product or service. If it is too large, find a way to specialize a bit more. When you can hit upon the correct balance, you will have continued success regardless of the economy.
If you fail to pinpoint your target customer properly, you are likely to throw away money on the wrong advertising campaign. It’s important to confirm that the clients you will appeal to are the folks you have in mind.
How to determine your customer base
When you begin to consider who would most likely be looking for your company, you must zero in on their general characteristics. Here are some basic qualities to consider:
- Occupation and income level
- Geographic location
That’s a good start, but you should attempt to further define the characteristics of your ideal client. Here are some things to ponder:
- Are they married?
- Do they own a home?
- Are they parents? If so, how old are the children?
- Will they buy online or in person?
You may find that you need to come up with your own unique questions that pertain to your industry. For instance, if you repair computers for businesses, you will want to know the average size of the company that will hire you. How many employees do they have? Do they use PCs or Macs? Do they prefer you work onsite or remotely?
Research your price point
"The first thing you have to understand is the selling price is a function of your ability to sell and nothing else," says Lawrence L. Steinmetz, co-author of How to Sell at Margins Higher Than Your Competitors: Winning Every Sale at Full Price, Rate, or Fee (Wiley 2005)
Although there is a lot of truth to this statement, you must do research and determine what your target market will pay. If every farmer is selling apples for twenty-five cents a piece, you’ll have your work cut out for you to sell one for three dollars. Of course, a top sales expert could probably sell an apple for thirty dollars, but they might need to cross a few ethical boundaries to do so.
Once you have established your niche market, you need to research the products that most closely resemble yours and research their current price range. Find out what are people willing to pay. You may discover that the price is pretty well set. Or you may learn there is wiggle room.
For instance, if you’re selling an eBook, people usually expect to pay less than ten dollars. Readers have many books to choose from and may skip over yours if you try to charge twenty. However, if you’re a portrait painter, you can charge whatever you like, as long as people are willing to pay. Some artists charge tens of thousands of dollars for a single painting.
If you stand out from others in your industry or can demonstrate that you provide a very high quality product or service, you can often increase your price tag from the norm.
Setting your price
In order to determine if your business concept is viable, you must figure in all your expenses into the equation before setting your price. It can be tricky if this is your first venture, as you may not be aware of all your costs. Always include a buffer that will take into account expenses you can’t foresee at this moment.
Once you establish a range, it is good to pick a price point that falls in the middle. For instance, if you’re a plumber and your research shows that professionals charge anywhere from $40 to $120 per hour, consider pricing yourself around $75 per hour.
Learning to price well comes from experience. Here are a few tips to keep in mind when you work out your price point:
- Some customers will gravitate toward the cheapest bid, but those clients are not ideal . Some people are looking for rock bottom prices. They don’t ask for referrals, but simply look at the price tag. If you are a dollar more than a competitor, they’ll move on. Since they often aren’t concerned with quality, they are not your ideal clientele. It is also worthy to note that these customers can be more work and trouble than higher paying clients.
- If you charge a higher fee, you’ll probably have a smaller client base . For some, having a huge client base is important. However, that doesn’t guarantee you a higher income. Let’s say a competitor has twenty clients a month and charges $30 per hour, while you charge $50, but have only fifteen clients. You would wind up ahead.
- It is usually easier to decrease your price than raise it. Although it isn’t impossible to raise your prices, it can be hard to do so with existing clients. They may wonder why they have to pay more for the same service. However, if you set your price too high, you can always come up with specials in order to lower your price. Some businesses need a little boost in the summer, which is why you sometimes see a lot of “Summer Sales.”
- You can create a special price for friends. I’ve seen entrepreneurs charge a different rate for friends. It sometimes appears to be a fall back for the entrepreneur who isn’t confident about their price point. Their circle of “friends” becomes quite broad, encompassing anyone who contacts them.
- Upselling is always an option . The advantage of setting a basic price that is on the low end is that you will entice more new clients. Once you have them on board, you can sell them complementary services. This is upselling. For instance, if you clean houses for $75, you can offer to do the laundry for another $20. There is nothing wrong with this, as long as you are upfront about it. It is the art of treating your existing clients as brand new prospects.
You will need to re-evaluate your basic financial model on a regular basis. It is important to stay flexible in any business venture. If you have taken on too much overhead too quickly, do your best to drop it before you drown in debt. If you discover that your price is too high, come up with an introductory offer to bring in new clients.
And if you’re doing very well, don’t change a thing!
Take a look at a more comprehensive worksheet on customer and market research here and a list of links and resources here.
Part seven of a series– The Yahoo Smart and Simple Guide to Starting a Business.