How to Price my Product or Service
You will learn
- How to price to cover your costs
- How to use your competition to price your products
- Cost plus or value based product pricing
The idea of running your own business is to make a profit, not just to survive, but to thrive. Often your success can depend on you asking, "how do I price my product or service?" Many small businesses fail because their pricing was incorrect. Pricing is a critical element to achieving a profit and something business owners are directly in control of.
If you price products or services too high, you risk alienating potential customers. However, if you price too low, potential customers may believe your product or service is inferior to that of the competition.
Not everyone buys on price alone, and you will need to think if you are selling "impulse buys" or "considered purchases". Some key things to consider are: what you can include in the costing, will you make a profit, what are your competitors charging, can you compete with them, the price your customers are prepared to pay, and where are you positioning yourself in the market place.
Pricing Your Product to Cover Your Costs
When pricing your product, think about ensuring your costs are covered. These may include:
Materials or products: If you are making something, you need to consider the cost of the raw materials required. If you are re-selling, you will need to consider the cost of the item to you and then base your price accordingly.
Labour costs: If you employ staff, their salaries need to be taken in to consideration as well as on-costs such and NI, insurance and any benefits you pay them i.e. commission. Sub-contract labour will also need to be considered.
Overhead costs: You will need to take in to account all overheads. If you operate from home, the overheads will be lower than if you have premises. Other costs you need to think about are insurances, marketing, stationery, website, hosting fees, travel and of course your own survival income.
The Market, and Your Competition
It is imperative you understand the market and the competition. When pricing your product or service, you need to understand how much potential customers are prepared to pay. How much they currently pay is an important benchmark for you to work to, so finding out how much your competitors charge is vital. However, do not be tempted to match the price unless you know it does cover all your costs. Think about your competitive edge and what you have that will make the customer buy from you; this will not necessarily be based purely on price. For example, is your product ethically sourced and environmentally friendly? Competitive edges such as this can encourage potential customers to shop with you, rather than your competitors.
Know your breakeven figure when you price products and services. Firstely, work out all of your costs of sales e.g. materials, packaging which are linked to the amount you make e.g. the more items you make the higher the costs are.
Then, work out your overheads e.g. rent, salaries, insurances, marketing, etc. These costs will not change not matter how much you make from your sales.
Add these together and divide by the number of "units" you are selling and you will identify the breakeven.
So for example, if you bought a bottle of wine for £2 and sold it for £4, have you made a £2 profit? Well the answer is no, you will need to think about all the overheads, storage etc. For example, if your overheads were £10,000 you would need to sell 5,000 bottles of wine to break even.
Cost Plus or Value Based
When pricing your product, you can then think about the profit you are looking to make and the two methods to consider are cost plus and value.
Cost plus involves adding a mark up to the breakeven. This can be a percentage of the total cost, and so knowledge of your industry norm can help establish how much margin to add. One word of caution, this assumes selling every "unit". If you do not reach 100% sales, your overall profit margin will be lower, very important if the items are perishable.
Value based pricing relates to the value customers attach to the product or service. This can work well within the service industry, i.e. higher prices for out of hours call outs, weekend services, etc.
If you are not yet VAT registered, but anticipate this to be the case in the future, build in the VAT element to your current prices so there is not a sudden jump in prices when you do register.
Carry out regular reviews of your pricing structure. Your costs can increase, and there could be changes in the prices your competitors charge, so you would need to react.