WHEN CAMERON POWELL launched River Rock Media Group, a Nashville, Tenn., photography and media production company in 2005, he charged just $75 an hour for his photography service. Considering that similarly equipped photographers can earn between $1,500 and $2,500 for a full day’s work, he’s certain he underpriced himself.

“It got me gigs and it gave me experience working with people. But it didn’t help me gain a whole lot of footing with the market I wanted,” says Powell who now earns the going rate. Instead, he adds, “I was attracting people who didn’t have any money.”

Powell’s experience is hardly rare. Newbie entrepreneurs often miss the mark on pricing, says Laura E. Willett, a small business advisor and finance professor at Bentley College in Waltham, Mass. Entrepreneurs either blindly place a price tag on their product or service without taking a proper reading of the market or, perhaps more commonly, they underprice their offerings on purpose – effectively apologizing to the market for being new and inexperienced.

Either way, missing the pricing target is a potentially business-breaking mistake, notes Willett. “The business must generate enough in revenues to, at a minimum, cover costs,” she says, adding that most entrepreneurs obviously aim to generate a profit, too. However, “if you price too low [or too high], you may not do either.” For instance, by charging too little, customers might walk away with the perception that “you don't really know what you're doing” or that the quality is subpar, she notes. And you may simply run out of money.

To avoid similar mishaps, here’s a primer on picking a price that the market (and you) can bear:

Gauge the Market

Before you sell a single item, “you have to make sure that there is going to be enough staying power and demand for your product,” says Bob Prosen, a small business management consultant in Dallas. As such, he recommends conducting a thorough market analysis. First, know who your intended customer is. For instance, do you hope to cater to kids, baby boomers or affluent males between the ages of 30 and 45? Then, find out what other companies already serve this market. At this point, you may need to hit price points similar to the competition or spend time distinguishing your product so you can charge a premium.

To really know an audience, companies often perform beta tests or they offer the free use of their product or service for a limited period of time. In return, they hope to work out any bugs and usability issues. They also want to gauge whether or not their intended customer needs or wants their product or service and if they do, what price they’re willing to pay.

And be sure to factor in prevailing economic, political and social conditions, says Bentley College’s Willett. In a downturn, for instance, consumers will often skip premium-priced products for cheaper options. Also, an upcoming presidential election or the “green” movement can play a roll in whether or not ever-fickle consumers will be receptive to your product or service.

Pick Your Pricing Strategy

Once you get a good feel for the market, select an appropriate pricing strategy. Most business consultants point to three different options: cost-, competition- and value-based. The right method for your company will vary depending on your target customer and your position in the market. For instance, companies that produce fairly generic products, like, say coffee mugs or paper weights might simply look at how much it costs to produce and deliver a product or service and then mark it up for profitability.

Another option is to look at how much the competition is charging and then price your products or services similarly. Nondescript services such as cleaning and delivery businesses often elect this method. However, Willett warns that business owners who mine the competition for a potential price must consider their own “cost basis”—that is, the cost of producing a product or serving a customer. If you don’t, she says, “you may not be covering your expenses.”

Greg Alexander, chief executive of Sales Benchmark Index, a strategic business advisory firm in Atlanta, likes the value-based approach the best. When your product or service has some distinguishing features or your customers receive some degree of value above and beyond the simple use of the product, you can often charge a premium, he says. Consider people who purchase Coach handbags, for example. They aren’t just buying quality craftsmanship — they’re buying an affluent look.

Keep in mind that businesses going the value-based price route need to clearly communicate the benefits. Big businesses convey value via a number of methods such as product placement, celebrity endorsements and advertising. Such lengths, however, are difficult for cash-strapped start-up businesses to replicate. Consequently, even if a newbie business’s product or service is truly “new” — that is, there are no real competitors — Willett says, “I always recommend that the company do some research into a business or service that has similar appeal and follow their lead.”

Other recent Starting Up columns:

• Starting Up: For Entrepreneurs, Opportunity Still Knocks
• Starting Up: The Art of the Pitch

("Starting Up," a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at dransom@smartmoney.com.)