Pricing your products

Pricing your product or service is a delicate balance between covering your costs and keeping your customers happy. Striking the perfect balance will ensure customers return to your business again and again - but get it wrong, and you risk alienating your client base.

What to take into account

  • Before you work out how you will price your offerings, work out the fixed costs you will need to cover. For example, if you are a retailer, your fixed costs might be £200,000 a year. If your projected sales are 20,000 items a year, you will need to add £10 to the price of each item to ensure you cover your costs. Of course, this may divide up unevenly - if you're a clothing retailer, you may add £40 to the cost of coats but just £2 to the cost of hats.
  • Factor the variable costs needed to produce or supply your product or service into your pricing as well. These include costs such as the raw materials used to produce the product, the extra labour involved in producing and supplying it, the cost of transporting it.
  • The value of the product or service to your customer. If a customer experiences a power cut, the cost to the electrician to come out might be £4 in petrol and £5 in tools - but the convenience for the customer of having their electricity restored and the expertise the electrician needs to have in order to fix the problem means he or she can charge £40 for the service.
  • Work out the criteria customers use to make decisions. Your pricing will need to supplement other services you offer - how fast can you deliver your goods? How conveniently located are you? How reliable is your business?
  • Look at how the competition prices its offerings. Unless there are aspects of your business which make a strong differentiation between your business and the competition, it's advisable to price your offering similarly to your competitors.

Premium vs. value pricing

  • Before you price your product, decide what you want your position in the market to be. Pricing makes a big difference to people's perception of a brand - imagine how much you would be willing to pay for a glass vase in Ikea, then imagine how much you would pay for the same vase in Harrods. What's the difference? Ensure your branding reflects your pricing, or your customers may be put off.
  • To help you determine where your business fits in the market, draw a matrix like the one below and try to work out where your business will fit.

pricing matrix

 

  • When you've decided where you'd like your business to sit, make sure you can meet your customers' expectations. If you have chosen to enter the premium market, this is particularly important: if your product or customer service isn't up to scratch, your customers will resent paying a high price for it.

Pricing strategies

There are various strategies you can adopt when you are pricing your product or service. These include:

  • Product line pricing - offering services or bundles of services for various prices. For example, at a hairdresser, a wash may cost £5, a cut may cost £15 while the premium level, a cut and colour, may cost £40.
  • Penetration pricing involves setting prices artificially low to drum up interest in the product. Think about the collectible magazines which start off at 99p but build up to around £6.99 as the series goes on.
  • Price skimming involves charging an unnecessarily high price for a product or service, and is usually used by businesses which are launching a new or innovative product into the market. This is usually only used for a short time, and is designed to filter off customers who can't afford the product, creating a sense of exclusivity around it.
  • Loss leaders are products which are priced so low their suppliers or manufacturers make a loss. Usually, retailers do this to encourage customers into the shop so they spend money on other products.
  • Psychological pricing - one of the most famous examples of this is the '.99' price tag, which fools consumers into thinking they are spending less than they are.

Checklist

  • Work out the fixed costs you will need to cover
  • Factor the variable costs needed to produce or supply your product or service into your pricing
  • Add the value and benefits of the product or service to your customer
  • Work out the criteria customers use to make decisions
  • Look at how the competition prices its offerings
  • Decide what you want your position in the market to be. Draw a matrix to help you.
  • Make sure you can meet your customers' expectations

FAQ

I don't have any direct competitors. How do I work out how much my customers will pay?
This is where your market research comes in: ask prospective customers how much they would be willing to pay, and look up how others in your field price their offerings.

Jargon buster

Cost-plus pricing: adds a percentage to the cost of producing or supplying your product or service to create a profit.

Resources

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