The idea of running your own business is to make a profit, to not just to survive, but to thrive and often your success can depend on you asking the question "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 questions to consider are: what can you include in the costing, will you make a profit, what are your competitors charging, can you compete with them, what price are your customers 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’re making something, you need to consider the cost of the raw materials required. If you’re re-selling, you’ll 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 into 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 into account all overheads, if you operate from home, these 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, and this won’t necessarily be based purely on price.
Know your breakeven figure when you price products and services. Work out all your cost 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.
Work out your overheads e.g. rent, salaries, insurances, marketing etc, these costs won’t 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 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.
To find out how you should be pricing your product or service, you need to:
- Determine the costs of producing and delivering the product or service.
- Set a price that is high enough to cover the costs but low enough to be competitive.
- Research the market to see what price it will stand, or indeed what the customer is prepared to pay.
People do not always buy on price alone, particularly when it is a "considered purchase". People want value for money; no-one likes to think they have been "ripped off". So be brave, you can always negotiate down, but you need self-belief and confidence. People buy from people and if you do not believe in yourself why would they buy from you?