Posted on: Wednesday, February 23, 2005

Balance between cost of business, pricing a challenge

By Joyce M. Rosenberg
Associated Press

NEW YORK — Figuring out how much to charge your customers or clients for goods or services can be a complicated process, one that can go beyond number crunching and into some philosophical issues.

For example, should you charge more than your competitors? Or price below them? Should you pass cost increases along? And what message does any of these alternatives convey about you and your company?

In setting a price, the two biggest concerns are costs and competition — how much do you have to pay to run your business, and how much are your rivals charging.

With costs, you need to analyze every aspect of your overhead, and also project whether your expenses are likely to change in the near future. There are many resources to help you with this, including books on starting a business, Web sites (try searching the Small Business Administration site, www.sba.gov, for the word "pricing") and organizations like SCORE, a network of retired executives who give free advice to small companies. You can reach SCORE at www.score.org or (800) 634-0245.

You also have to take into consideration what your competitors are charging for similar goods and services, and that's where some of the more perplexing questions can arise.

Many new company owners decide to charge less to get customers quickly, so they can build a reputation that will lead to more business in the future.

Betsy Ludlow, founder of Slim and Tone, a chain of workout centers for women, took that approach in the beginning, when "I was trying to get a foot in the door." She said she priced her franchises about $1,000 below those of her competitors.

But not everyone thinks that approach is necessary — or even advisable. You might be giving prospective customers the impression that your products or services aren't worth paying a little extra for.

"If you perform a high-quality service, maybe you should be paid more — not everyone is looking for the lowest price," said Stephen Fishman, a San Francisco-based attorney and author of "Working for Yourself." "Many people figure they get what they pay for."

Over the past few years, many small businesses have shied away from raising their prices and fees, absorbing higher costs or making cuts where they can. But many others have had to charge more, and predictably have run into resistance from clients and customers.

"It's a challenge," said Josefina de la Cruz, a certified public accountant in Santa Ana, Calif. She said some of her clients expect her to charge less because her firm is small, but that they don't realize they get more personal service than they might find at larger shops.

"We have to explain to the clients the added value," said de la Cruz, who added that she has sent clients a letter explaining the reasons why her firm, which has 10 CPAs, needed to increase its fees. Among them: paying competitive salaries to ensure a high level of service.

Businesses that tend to work under contract often give themselves leeway to raise their fees or prices during the term of the agreement. Fishman said that companies need to charge more if they end up doing more work than expected, or if their costs suddenly spike upward.