Pricing Your Product or Service
“Pricing is actually a pretty simple and straight forward thing. Customers will not pay literally a penny more than the true value of the product.” – Ron Johnson
Setting your prices at the right level requires an in-depth knowledge of your market and who you are looking to sell to.
Your research on potential customers and competitors is key to getting this right. Whether it’s ‘expensive and exclusive’ or ‘cheap and cheerful’ (or somewhere in between!) its about ensuring that you make the profit margin required for the business needs and running a commercially viable enterprise. You are looking to maximise profit after all your costs have been covered.
In addition to the research, you will need to know what costs are going into the product or service you will be supplying.
Variable costs such as raw materials and utilities (gas, electric, water) will increase in proportion to the quantity and volume produced. Fixed costs such as rent, wages and rates for example will remain constant. You need to work out what proportion of your price needs to be factored in based on these costs. A combination of the two costs will give you a figure that is known as breakeven – selling ‘this much’ at ‘this price’ will cover everything required for the business to survive without making a surplus. But a successful business is about making profit and to complete the process of arriving at a price that is right, you need to factor in “margin”
There are various methods for pricing for the desired profit level but any method (without just guessing) is reliant on detailed knowledge of the market.
- Mark up or cost plus pricing is simply the cost price (i.e. breakeven price as described above) with a percentage added based on factors in the market such as what does everybody else charge? What is the demand? If it’s high, can I charge a premium? If it’s low will I need to accept a lower profit margin and sell volume? Is my product or service unique or limited competition? All considerations but it’s always worth remembering that even with something that is high quality or high demand, there is likely to be a limit to what someone is willing to pay. You also need to remember that if you don’t sell every unit of what you supply, the profit margin will be negatively affected.
- Value based pricing can be much more rewarding but is very much based on your potential customers perception of the value they put on the product or service you supply. You can potentially maximise the profit margin made above cost if what you offer is highly prized or you offer significant added value with what you supply.
Understand how you will make your business profitable.
In general it is good business practice to review your prices regularly against the costs involved, customer’s expectations and competitor activity to ensure you remain ahead of the game. As a successful business, you should always maximise profits on the goods and services you supply.
Don’t get hung up on pricing your product. It is always recommended to start higher than you feel comfortable because it’s easier to lower your price than raise it. Seek help and advice from accountants, mentors, business advisor’s or even ‘friendly customers’ who will provide you independent guidance.