Pricing is a headache especially for many new entrepreneurs, and resources should be allocated to the pricing process. We interviewed Mikko Keskinen on the topic, and in this blog, he explains the pricing process, the importance of pricing, and the different stages of pricing. Keskinen is an experienced professional in various sectors, with a long career as an entrepreneur, lecturer at JAMK University of Applied Sciences, and a business coach. Keskinen works as a business coach in the Startup Factory's Idea to Business (Ideasta yritykseksi) and Business coaching (Yrittäjävalmennus) programs.
Where to start with pricing?
First and foremost, it is important to understand how pricing should be approached. There is a textbook version to begin pricing by determining the costs and margin of your operations. However, it is also possible to start the pricing process by examining market prices first and simultaneously considering how to offer the same product or service at lower costs. Through this approach, pricing can be formulated to allow for sufficient profit margin. Understanding the market and your own product is crucial in pricing.
"You have to know your product and the market in order to price it correctly. You need to determine the value it brings to the customer and build the production costs accordingly," emphasizes Keskinen.
"You have to know your product and the market in order to price it correctly. You need to determine the value it brings to the customer and build the production costs accordingly"
- Mikko Keskinen
Thus, in pricing, it is essential to consider the value that the product or service provides to the customer. By justifying the benefits of the product or service to the customer, you are pricing the offering and demonstrating why the customer should buy it.
Additionally, it is crucial to monitor your costs, as sales must cover the expenses before determining the actual profit. However, in pricing, it is also important to understand that not all costs can be recovered from the first customer. The provider of the service or product should view their operations as long-term and distribute the costs evenly in connection with sales.
In a nutshell, the starting points for pricing are:
- Check the market first and find out at what price others are selling similar products or services.
- Determine how you can offer the same product or service as others but at lower production costs.
- Consider the value that the customer gets from your product or service.
- Monitor your costs to ensure they are covered by sales.
Should pricing be reviewed?
Once the pricing for a specific product or service has been established, it is important to continuously monitor and update it if necessary. Prices for your own products or services should be regularly reviewed and adjusted for various reasons. However, the process of reviewing and adjusting prices differs slightly between products and services. For example, it is justifiable to increase the price of a product when production costs rise or due to inflation. On the other hand, the price of a service can be increased when the provider's expertise improves.
"If you clearly enhance the product in a way that adds value - you add a feature that genuinely provides the buyer with a better added value - then it should come with a price tag," says Keskinen.
Many new entrepreneurs struggle with pricing. But is it really as challenging as it seems? According to business coach Mikko Keskinen, there are two answers to that question: "Yes, if you haven't done your homework. No, if you have done your homework."
Three stumbling blocks in pricing
Next, we approach pricing through three significant stumbling blocks. Pay attention to these points to avoid the troubles they can cause!
- Insufficiently defined cost structure
For example, if an aspiring entrepreneur forgets about pension contributions, the resulting costs can be surprising. Ignoring the cost structure can, in the worst case, lead to bankruptcy.
- Price does not reflect the real market price
In the worst case, a service provider causes market dumping. This means that the pricing is significantly lower compared to the general level, resulting in no one else being able to charge the market price for their products or services.
- Failure to consider the necessary amount of money
Defining your own goal is crucial. What you want to achieve with your operations is essentially the key to how you develop and price your product or service.
Is pricing difficult?
Pricing is often considered difficult, but is it really?
"Yes, if you haven't done your homework. No, if you have done your homework," sums up Keskinen.
Therefore, pricing does not have to be difficult, but thoughtful consideration, justification, and review are necessary for successful pricing. However, you don't have to face pricing alone! In the Idea to Business coaching program, experts help you develop your business idea and provide tips for pricing your product or service. The program is open to students, researchers, and staff members of Jyväskylä University of Applied Sciences and the University of Jyväskylä who have a business idea. It is also open to students studying at Gradia through the EduFutura cross-study program, as well as those enrolled in open universities.