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How do I price my product when starting out

How do I price my product when starting out
Duncan Lewis
Mentor, Business development, Start-up advice
Find out more about Duncan Lewis

In this article you’ll learn

  • what you need to consider to create a product pricing strategy
  • how knowing your target market can help you
  • the importance of keeping up-to-date with market trends

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 has been proven that it is 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 product pricing strategy for your business and this is based on research. Here are my top tips for doing this:

Know your Target Market

You need to find out how much your potential customers 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 breakeven figure.

Customer paying for a product
Cost-Plus Pricing

This strategy is where you add a margin (mark up) to your breakeven figure. This is usually expressed as a percentage of breakeven. 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.


Value-Based Pricing

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.

Shopping


Other Factors

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.

Ongoing

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.

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Summary

Duncan Lewis explains how to decide on a product pricing strategy when you're starting a business and how knowing your target market can help.