One of the most exciting and worrying aspects of a business is deciding what different prices to sell your products at. With pricing, you need to be experimental with it as well as intuitive.
If you price your products too low and you might get a ton of sales. However, you might find yourself going under when you tally up your expenses at the end of the month.
If you price your products too high, you might give off an idea of luxury, prestige, and exclusivity thereby attracting a pricer customer. This is good because even though they are smaller in number they make up for volume by purchasing your products at the higher price.
The first thing you need to think about before anything is your market. It is essential to have good knowledge of your markets such as potential customers and competitors. You need to know how much potential customers are prepared to pay for your products or services. If they already buy similar products from someone else, find out why and how much they spend. You can do this by checking out your competitors. See what they charge, but don’t match a price unless you know you can afford to.
Pricing involves adding a markup percentage to costs; this will vary between products, businesses and sectors. Value-based pricing is determined by how much value your customers attach to your product. You should decide which approach is most suitable for your products before making a calculation.
Work out your costs
You need to include all direct costs, including money spent developing a product or service. Then calculate your variable costs (for materials, packaging and so on); the more you make or sell, the higher these will be. Work out what percentage of your fixed costs (overheads such as rent, rates and wages) the product needs to cover. Add all of these costs together and divide by volume to produce a unit break-even figure.
You will need to add a margin or markup to your break-even point. This is usually expressed as a percentage of break-even. Industry, experience or market knowledge will help you decide the level of markup. If the price looks too high, trim your costs and reduce the price accordingly. Be aware of the limitations of cost-plus pricing, because it works on the assumption you will sell all units.
You’ll need to know your market well to set a value-based price. For example, the cost to bring a hairdryer to market might be £10. But you might be able to charge customers £25 if this is the market value.