Pricing methods when starting a business
You will learn
- What pricing methods you need to consider
- How knowing your target market can help you
- The importance of keeping up-to-date with market trends
There are lots of different pricing methods you need to consider when setting on a price for what you're selling in your new business. Ask your customers to pay too much for your product or service and they will stop buying; ask too little and your profit margin slides or customers assume what they are buying is poor quality, so it’s important that you get it right when pricing your product. It is also common for start-up businesses to set their prices too low. It's always much easier to lower prices than it is to increase them.
It is vital to select an optimum price that factors in all your costs and maximises your margins, while remaining attractive to customers. There is more to this than gut feel or opting for your best ‘guestimate’ price. The key is choosing the best pricing method for your business and this is based on research.
Here are my top tips for pricing:
Know your Target Market
You need to find out how much your target market will pay, as well as how much your existing competitors charge. You can then decide whether to match or beat these. Simply matching a price is dangerous however, without knowing about your costs.
Know your Costs
You cannot set a price for anything without knowing what your associated costs are. You need to be sure all your variable costs (cost of sales e.g. supplies, materials etc.) and fixed costs (overheads e.g. rent, insurances, promotion, mobile etc) will be covered. Remember the more you sell, your variable costs will increase.
If you add all of these costs together and divide by volume (of product), this will give you a unit break-even figure.
This strategy is where you add a margin (mark up) to your break-even figure. This is usually expressed as a percentage of break-even. Industry norms, experience or market knowledge will help you decide what level of mark-up to choose. If the price looks too high, trim your costs and reduce the price accordingly.
You'll need to know your target market well to set a value-based price. This strategy is based on the perceived value that your customer attaches to your product/service. For example, you might have a ‘going rate’ price but the flexibility to increase or lower this price in line with the client you are working with i.e. large organisation or one-person business.
How will charging VAT have an impact on price? Can you keep margins modest on some products in order to achieve higher margin sales on others? Selling at odd values (eg £9.99) rather than whole pounds is common.
Your prices can seldom be fixed for long. Arguably, you should be looking to increase your prices annually, at least by the prevailing rate of inflation. Your costs, customers and competitors can change, so you will have to amend your prices to keep up with the market. Keep up to date with what's going on and talk to your customers regularly to make sure your prices remain optimal.