Stumped about what to charge? Setting prices is an art and a science—and a little bit of guesswork. Here’s how to figure it out.

By Geoff Williams

Jeannette Doellgast spends a lot of time thinking about numbers. She has been doing so for more than a year, ever since she and her husband and business partner, Mohsen Alam El Din, bought the Plumbush Inn in breathtakingly scenic Cold Spring, New York. For Alam El Din, 50, born in Egypt and entrenched for 20 years in the restaurant industry, running his own company is his American dream. Doellgast, 44, gamely switched careers to join him—after about 15 years as an executive in the textiles industry and a three-year stint as an elementary school teacher. With the bed-and-breakfast, she soon found herself immersed in the art and science of setting prices.

First, Doellgast concluded that they would have to raise all the prices for both the rooms and food at the Plumbush Inn, which had been in existence for 30 years when the couple bought it. Longtime customers weren’t pleased, and they made sure to let Doellgast and Alam El Din know it. “It was a risk,” admits Doellgast.

It has paid off. The Plumbush Inn stands to bring in $1.25 million by the end of 2005. Considering that Doellgast and Alam El Din paid $1 million for the business—with a matrix of many loans and all their life savings—they appear to be off to a good start.

Determining the Price
There is no set formula for price-making, because every business is unique. “But the basic questions you need to answer are, What is the market going to pay, and What are your costs?” says Marsha Lindquist, a business strategy consultant in Gaithersburg, Maryland.

Those two concepts get a little tricky when you’re a service business and not selling a product, so let’s stay with products for a moment. Anthony Shurman, 34, president of Yosha Enterprises Inc. in Westfield, New Jersey, sells Momints, breath mints that were introduced in 2002 at $1.99 for a 36-mint package. Later, Shurman dropped the price to $1.79, and in 2003, he took the product nationwide, charging $1.69 per package. Each time he dropped the price, he had a good reason for doing so—to stay competitive with competing brands.

When Momints debuted, Shurman says it was the only liquid breath mint on the market, so its uniqueness allowed him to charge higher prices. As Shurman explains, “I think when you’re launching a new product or starting a new business, there are plenty of examples of businesses going after a target audience and creating a cachet for themselves by pricing a little higher and adopting an elite strategy, where you present yourself as this high-end competitor in the market.” Shurman also felt he could price the product higher because each package had 36 mints, more than any other brand.

Looking back, Shurman believes his first strategy for pricing really wasn’t the best one. “If I were to do it again, I probably would have started with a lower price. Our consumers don’t really give us credit for having those extra mints, and I think a more visible difference to the average consumer would be a lower price,” says Shurman. That’s why he used a regional grocery chain as a test market, where he sold a 28-mint package for 99 cents—70 cents less than his 36-mint package. Says Shurman, “Our sales went up 350 percent.” Yosha now brings in more than $3 million annually, and Shurman has reason to believe he’ll sell even more mints at the lower price.

However, while understanding what the customer is willing to pay is important, so is understanding your own psychology when it comes to money. After all, the price you select for a product or service is going to reflect on both you and your business. Is your company one that attracts those who identify with Desperate Housewives, or the desperate housewives clipping coupons and wondering if their husbands are going to be laid off?

Doellgast and her husband decided they wanted the Plumbush Inn to be upscale, the kind of B&B where romantic couples go. “We are a slow-dining experience,” says Doellgast, who says she raised the prices because offering the public a richer experience costs more money. Says Doellgast, “We don’t buy anything frozen. Everything is fresh, which makes a difference in the price.”

The Plumbush Inn also uses organic products, which cost more. But when people know what they’re getting, they don’t mind paying for it. In fact, Doellgast points out that the customers who had initially been angry at them for raising rates later returned with new expectations—realizing they were coming to a high-end inn—and seemed very happy with the changes.

“People bring a whole set of equations with them when they make a purchase, and one of the values for most people is that high price equals quality,” says Rob G. Docters, co-author of Winning the Profit Game: Smarter Pricing, Smarter Branding. “If you’re successful, you ought to have a price that reflects the success.”

In the same breath, Docters warns not to go overboard: “Customers resent it when they think you’re charging them much more than you should be. It’s an old Puritan ethic—nobody wants to be ripped off. So you have to know your customers and what they will tolerate.”

The Intangibles
If you’re selling breath mints, a lot of fixed costs go into creating your product and distributing it; of course, the store selling your product deserves a cut, too. Even your customers understand that you incur those costs and that you deserve a profit. It’s a little different selling the intangibles—like consulting services.

One smart idea is to turn an intangible into something you can touch. “In my business, financial consulting, we’ll bring out mock financial plans and show them to clients or prospects so they can see exactly what they’re going to get,” says Los Angeles business advisor Robert Pagliarini. “Suddenly, you’ve turned a service into a product. We can show them sample reports, charts and graphs—all these products that really represent the service we provide.”

It’s a shrewd strategy, because adding value to your price is what really wins over consumers. “Pricing is an art, but it’s not only about pricing, it’s about differentiating yourself and deciding what your niche [is], and what the value of your niche [is],” says Doellgast. “If you only build your [business] around your low price, somebody else is going to come along next week and undercut you. And then how have you established your market? You really haven’t.”

Geoff Williams is a freelance journalist in Loveland, Ohio. He can be reached at gwilliams1@cinci.rr.com.