Pricing decisions are critical for your business. What you charge will affect how many sales you make, determine the profit achieved and usually whether your business can survive.
Many new businesses price their business by calculating their costs and adding a margin that provides for their desired lifestyle. Others price their business lower than their competitors in the belief it will open doors. Neither of these take into account the customer or the market gap, whilst limiting profit potential.
Pricing is also a marketing issue.
Your pricing level will impact on the potential customers’ perception. Simply setting a low price is not the answer. If you are too cheap, they may believe quality is poor or you are desperate for business.
In addition the incorrect pricing at start up, especially if too low, is more difficult to amend in the future.
However, if you charge too much, then they may choose your competitor. If you plan to charge a higher price than your competitors then you need to answer the possible questions:
- Does the product have a genuine advantage?
- Do you offer a real unique benefit that customers will pay for?
- Are your customers motivated to pay a premium price?
- Is the added value you provide clear to the potential customer (eg after sales care)?
Service businesses that charge an hourly rate will usually calculate a minimum price based on the number of hours the fee earners can work (allowing for holiday / sick pay) and the desired return for that period.
We suggest that you use your market research to identify what your product or service is worth to the customer and the price level they value and are prepared to pay.
KEY CONSIDERATIONS #
Your price should cover:
- Forecasted volume
- Production cost – fixed and variable
- Delivery cost
- A perception of value or unique offering
- Payment terms
- Profit margin – reward
- Special offers / promotions
- Odd value pricing such as £x.99
- Loss leader
- Skimming – unique, high
- Penetration – low, for market share, high volume
Pricing level? What your customers are prepared to pay!
Consider impact on:
- Profit per sale
As a good guide, you must be aware of what your competitors are charging, but this should not be the sole basis of your chosen level.