How To Price Your Products And Services
Pricing your product or service right is vital for the continued success of your venture.
We all know that pricing impacts all aspects of your finances from cash flow to ultimate profit and loss.
But how and why is it so important to get your pricing right?
Pricing strategies affect your customers. Every consumer is different, but most of us like to feel we spend wisely. Pricing methods and price sensitivity ultimately decides whether your customer makes the purchase from your brand.
It is all a question of understanding your customers’ perceptions.
It can become complicated when finding a selling price formula that works for you, but it doesn’t have to be. Your goal price will usually not be the number you selected on day one of your small business.
Trial and error and adapting your approach is the best way to gain optimal pricing results.
What Factors Should You Consider When Pricing Your Products or Services
First things first, deciding which factors matter most when tackling the pricing of your new venture. Although many of the factors may compete, forming a list that aligns with your business is the best way to continue your brand’s values and ethos.
Whether it’s profit vs a customer’s need to save, or employees vs suppliers, learning to balance your businesses operations is vital for success.
How do you price your product or service? Decide which influences matter most. We have shared a few specific factors below.
Your Current Market
Launching a brand-new product is rare. By assessing your current market, you can see where you fit in, where there may be a gap and how best to fill it. Apps such as Deliveroo and Uber succeeded as low-cost alternatives to established products.
Your Pricing Objectives
A pricing strategy can be used to achieve a variety of business goals. Whether you opt for low pricing to win market share or aim for a high price point for a higher revenue per customer, it’s crucial to assess your brand’s end goals.
If you have a range of products or services, you might need to consider not only your pricing strategy but your entire brand. Ask yourself if your business aspires to be high-end and expensive, or affordable and good value? This will help you widen your brand awareness and position within your desired market.
Your Costs
Pricing products to sell is only one part of the picture. As a minimum, you need to recover all your direct and indirect costs.
What are direct costs? This is a price that can be directly tied to the production of specific goods or services.
Direct costs include:
Raw materials
Production costs
Energy use
Packaging and distribution
What are indirect costs? This is a cost that is derived from overhead charges. Indirect costs may be either fixed or variable.
Indirect costs include:
Staff wages
The rental of premises
Taxes
Other general overheads
Costs tend to head upwards. This will eat into your margins, so it’s important to review pricing in parallel.
Customer Behaviour
The ability to respond to change is an important feature of pricing. Customers’ changing attitudes, needs and desires will continuously influence your pricing point, to adapt and capitalise on times of high or low interest. You can use sales, discounts, and other pricing strategies to fine-tune your offering.
Your Competition
Pricing strategies are individual and dependent on your brand but monitoring competitor pricing is an important part of the mix. By carefully considering your competitors pricing strategies, you can decide your place in the market and encourage customer loyalty. As well as competitive pricing, quality and service are vital to grow your market share and continue winning customers.
Understanding Your Break-Even Costs
Whatever type of pricing strategy you adopt, you need to break even as a minimum.
The break-even point is when your price covers your costs. Knowing it stops you from making a loss on sales. As a result, it is important to calculate your costs accurately. They typically break down into two categories.
Fixed Costs
As the name suggests, fixed costs do not change. Your office rent, for example, will not change whether you sell 100 or 1,000 products.
Fixed costs might include:
Rent or Lease Costs
Fixed Employee Salaries
Office-based utility bills
Insurances
Loan Repayments
Business Licences
QA & HSE Certification
Fixed costs are often called overheads. It is good to keep them to a minimum.
Variable Costs
Variable costs will change depending on how your business is performing. Selling a lot of products is great news, but you’ll need to spend more to manufacture and deliver them.
Variable Costs might include:
Supplies & Raw Materials
Workshop or Factory Utility Bills
Temporary Staff Costs
Sales Taxes (Such as VAT)
Import or Export Duties
Travel & Distribution
Personal Expenses
Calculating the minimum price you can charge to cover your break-even costs is a vital step toward a successful pricing strategy.
Different Pricing Models
Not sure which pricing model best suits your business? Look no further.
There are two main types of pricing strategies to consider. The decision will depend on you, your products and services and your marketplace.
Cost-Plus Or Mark-Up Pricing
Cost-plus or mark-up pricing is the simplest of the two models. To apply it, business owners need to fully understand how much a product costs to make or how much it costs to deliver a service.
For example, a product might cost £25 to make. A cost-plus model might apply a 50% mark-up setting the price at £37.50. It is a very straightforward way of pricing.
Advantages:
Takes limited resources or additional market research
Provides full cost coverage
Consistent rate of return
Disadvantages:
May be inefficient as there is less incentive to cut costs
Does not take consumers into account
Value-Based Pricing
Value-based pricing refers to estimating the value customers put on your product or service. Importantly, it is not based on costs. It is often used in fashion and retail where some brands are perceived to be worth more than others. Food and drink, especially where there is an exclusive or limited supply, also may benefit from value-based pricing.
Value-based pricing requires that you understand your customers and their habits in detail. Luckily, modern digitised markets make data more available than ever.
Advantages:
Increased brand value
Higher profit margin
Customer loyalty
Disadvantages:
Niche markets
Increased competition
Responding to Your Competitors’ Prices
It is very unlikely that your business will have zero competition. Even if nobody is doing exactly what you do, customers will have choices about where they spend their money. It is important, then, to keep an eye on what your direct and indirect competitors offer.
Responding to lower-cost options elsewhere is a balancing act. How many customers might you lose by being more expensive? How much profit might you lose by cutting prices? You need to be clear about your goals too. What does victory mean? For most, it means higher profits overall. Don’t be fooled into chasing more unit sales or customers at ever-decreasing margins.
You can, of course, use pricing changes to actively attack competitors or defend your position. In defending yourself, a small margin reduction may be less costly than losing market share. In attacking, you might want to lower your margins considerably to win market share.
Tips for Adjusting Your Pricess
Optimising your pricing strategy is important to understand your customers and redefine your value. Raising or lowering prices will always be the result of careful thought.
It will, of course, have an impact on your customers, so communicating any price changes needs to be well thought-out to ensure a smooth transition. Opt for an appropriate communication strategy around breaking the news, which explains and answers any customer questions.
Raising Your Prices
There are several steps you can take to avoid upsetting customers with a price increase. One step is to change your product or packaging to increase its value to your customer. Even a small update that doesn’t impact your costs, can make a huge difference to your customer.
If you’re providing a service, you can alter how you are pricing by charging for additional features. Whether this is travel costs or a high-quality service, deciding what is included as standard will count as a price change.
Charging for additional or ‘value-added’ services or products is one way to lessen the blow. Get creative and find out ways to improve your consumers’ experience with your brand, this will not only allow you to charge a higher price but leave a positive lasting impression with your customer.
If you sell garden plants, for example, free fact sheets on how to care for them would count as a value-added service. This type of bonus material can make a higher price seem worthwhile.
The most important aspect of raising prices is to be honest and transparent with customers. You can fight the assumption that you are purely profiteering by sharing the reasons behind a price rise. You can also experiment. Why not test the water with a select sample of products or customers? This way you can effectively judge whether a price increase is the right step for your business.
Lowering Your Prices
Price reductions should always be good news for your customers but might be less so for you. Increasing sales at a lower profit margin needs some careful calculating to ensure it is the right move for your business.
If you do decide to go ahead, communication around price cuts needs to be handled carefully. Customers who have paid a higher rate may be frustrated or feel cheated. Lower prices can also be associated with a reduction in quality, as customers may wonder what cuts you’ve made to afford them. You might inadvertently give the impression that you’ve been overcharging for products or services in the past.
Whether it’s a short-term sale to generate interest, a response to a competitor or something more long-term, price reduction shouldn’t be undertaken lightly.
Frequently Asked Questions
How Much Profit Should You Make On A Product or Service?
In short, every business model is different.
According to the Corporate Financial Institute, a small business making a 20% net profit margin is considered doing very well. 10% is considered average. However, this is merely guidance. Defining the profit margin you need to be successful is a vitally important part of your business planning.
What Is A Product Or Service Pricing Strategy?
Your pricing strategy refers to the model or method you use to calculate the best price for your business product or service. While there are no rules, there is plenty of expert advice, tools, and theories you can adopt to make sure you get it right. You needn’t do it alone.
Here are our top tools to evaluate a modern pricing strategy:
What Are The 4 Types of Pricing Strategy?
There are many categories of Pricing Strategy, but they fall into four basic types:
- Premium pricing refers to charging a high price because the perception of the product or service is high. First Class Five Star travel would be considered a Premium priced product.
- Skim pricing refers to just undercutting competitors. It is often used by supermarkets.
- Economy pricing is typically low margin, high volume pricing. Bargain stores use economy pricing to attract high levels of custom.
- Penetration pricing is artificially reduced to gain attention, attract new customers or enter into a new market.
Why Is Pricing A Service Difficult?
You can often accurately calculate the cost of making a physical item. With a service, the costs are associated with your skills, time, and knowledge. Don’t be disheartened, though. Finding the right price is possible with some careful thought, accurate timekeeping, and appreciation of the value of your work.
Why Is Price So Important In The Marketing Mix?
You may not be motivated entirely by money but setting a price that is too high or too low will impact your business’s success. Pricing correctly means getting the balance right and understanding the value that customers see in your product or service.
