Both art and science, pricing is the fuel that drives your business. Pricing is used to calculate financial projections, as well as profit and loss. And it's also your ultimate sales tool. Prices that are too high or too low can spell death for your business. Yet there is no magic method for arriving at your optimal sticker price. It's usually a matter of weighing key business factors. Here are the ones to consider before pricing a product or service:

1. How your product or service is positioned in the marketplace.
2. How pricing affects demand.
3. The fixed and variable cost of goods and services.
4. Any legal constraints or ceilings on pricing.

Action Steps
The best contacts and resources to help you get it done

Explore pricing methods

Businesses use a vast number of methods to arrive at their prices. Take some time to understand the various formulas before choosing one.

I recommend: Download an overview of pricing methods and formulas for both products and services from the SBA or consider pricing software, such as Price Director. Consulting firms Porter Sloan and The Advantage Group offer a number of pricing resources to get you started.

Determine the cost of your products and services

Knowing your costs is crucial when plotting break-even points and profit margins. A product's costs can be both direct (materials) and indirect (overhead), but generally it's the total cost of producing and delivering the product. When pricing your services, keep three costs in mind: materials, labor and overhead.

I recommend: Download a pricing tutorial from SCORE that includes cost worksheets and a glossary.

Price based on cost

Cost-plus pricing is a common pricing method because it's relatively simple to calculate. Basically, you take the total cost of your product and add the profit you'd like to make to arrive at your price.

I recommend: Answers.com offers formulas to follow to derive your prices using the cost-plus method.

Price competitively

Survey the landscape by looking at your competitors' pricing. Take everything into consideration when evaluating their prices, such as the value they add and the market they serve. If possible, visit your competitor's stores, Call anonymously to inquire about pricing or ask trusted customers to solicit pricing information. If that's not possible, contact a trade association in your industry and see if they monitor pricing.

I recommend: Find a directory of trade associations at MarketingSource.com.

Price based on quality

When pricing your products or services, consider the image you want to portray. If you're positioning your company as a high-end retailer or service-provider, you should choose prices on the higher end of the scale. However, beware that low-price strategies, sometimes called penetration pricing, rarely win in the marketplace since big companies can undercut them.

I recommend: Ask your entrepreneurial peers about their pricing strategies and perceived quality at the IncTalk.com discussion forum.

Review your pricing when cost or quality changes

No price is final. When the cost of producing your product rises, so can its price. Or you may have added more features or benefits, upping its value. The economy, competition, and entering new markets also affect prices. Raise them in small increments though. And when pricing big-ticket items, remember to explain price hikes clearly.

I recommend: Review pricing methods and use a profit margin calculator from Bankrate.com.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Take shrinkage — due to employee theft or human error — into account when determining the cost of your products.
• •  Perceived value, such as the cachet of Rolex watches, translates into higher prices.
• •  Effective pricing treats customers fairly, considers value and maximizes profits.
• •  Avoid price wars, since they ravage profits.