An alternate title to this post could be “What’s the difference between $819 and $799?“. At a glance, the answers might seem to be $1.20 and $20. However, when it comes to pricing your products or services, the answer isn’t quite so simple.

To start off, you need to know what you need your margins to be in order to become profitable. If you charge so little that you cannot cover expenses like taxes, payroll, advertising or rent, it will be impossible to stay in business. To start, you also need to know exactly what your cash outflows are, then price your goods or services so that you can make a profit.

Once you’ve done that math, it’s time to do some tough mental math. Because what you price your product can drastically affect customers’ perception of your product. The truth is, that $5.19 feels different than $3.99 to customers. While the actual difference in price is minimal, it affects which product customers may choose and what they expect to receive in return.

It’s important to understand that if you charge a higher amount for something, people expect to get something more, whether it’s better quality, quicker service or simply a larger quantity of something.

On the flip side, charging a lower amount is not a guarantee that customers will buy from you. In fact, prices that are significantly lower than the rest of the industry can cause customers to think that your product or service simply isn’t very good.

So what’s the bottom line when it comes to pricing? Research, testing and focus groups. It’s important to know what the industry standard is for a service like yours as well as what the high and low ends of the market are. Then you can ask people what they’d expect to get for various prices – what they would think was a good deal and what was a rip off. From there, you can pick a price point that you feel reflects your place in the industry and your target customer. Then you need to test, test, test. Use surveys to see if people chose someone else because of price. In all its many forms, testing is a crucial part of any business.

Ultimately, pricing will be an important and strategic part of your business plan, especially when you are just launching your business. Keep in mind that prices can be adjusted, specials can be run and you are likely to add additional products and services over time. Your pricing model will evolve with your business. Just be sure that whenever you choose a price for any product or service you think of it from a profit perspective – but also from your customer’s perspective.