How do I set a price for my service or product?

Getting your pricing right is paramount to success

Pricing your product/service properly can be a real nightmare.  Make it too high and no-one buys it; make it too low and you make a loss each time you sell.  Here are a couple of thoughts on how you can avoid some of the pitfalls.

Don’t just guess.

First of all, ask yourself what you’re trying to achieve with the product/service.  Are you new to the market and want to make inroads?  Are you trying to match (or undercut) competitors to get a quick market share?  Are you aiming to capture a specific part of the market (eg the green market) where price may not be such an issue?

What’s your minimum price to make a profit?

Being the cheapest is usually like being at the front in a race to bankruptcy – feels good to be out front but the feeling isn’t going to last long…  When considering your minimum price you need to take into account every cost in the business that needs to be covered.  That means rent, electricity, wages, postage, packing, transport costs, loans – everything.

Every business is different but as a starter work out all your fixed costs (rent, electricity etc) and then break the total down into months, weeks or days.  Then look at the product/service cost per unit/sale and calculate how many you expect to sell per day/week/month (be pessimistic on your expected sales figures).  Spread the fixed cost across the expected sales and see what the final figure is per sale.  That should be your absolute minimum cost; ideally you will want to add a little more on to make sure that you have some extra profitability built in.

Do your homework.

Whatever you’re trying to achieve, do some homework by looking at the competition and analyzing you offering against theirs.  Are they offering exactly the same as you or do you have something additional that discriminates your product and can therefore carry a higher price?  Equally, if your product does less than theirs then you need to consider a lower price unless you have a discriminator elsewhere (such as quality/ruggedness, swiftness of supply etc).

Think about it from the customer perspective.

Will the customer be thinking about the product as a commodity?  If so then they are likely to be quite price sensitive and tend to go for the cheapest option.  If they look at it as more of a luxury or choice purchase then they are likely to be less price sensitive, giving you more scope for selling higher, backed by some good feature/benefit marketing.

Once you’ve set prices and are trading don’t be afraid of increasing your prices as you move forward.  The chances are your fixed costs are going to rise (even if only by inflation) so you should be reviewing prices at least once per year (more if you rely on raw materials like steel or oil that fluctuate widely over short periods).

How will customers react to price rises?

If prices are rising marginally in line with inflation then people will generally accept them (don’t you?).  But do be aware that you need to keep them informed, don’t just let them find out by seeing their next invoice.  Take the price rise as an opportunity/reason to go out and talk to your customers to reinforce your company’s desire to keep them as a client.  Inevitably some customers will drop off when you raise prices but the general feeling is that those customers are the ones focused almost exclusively on price and are generally the trouble makers anyway so you should be content that they’re going elsewhere and making your competitor sweat their prices!

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