How do you go about setting your price?
There are many different approaches to price setting, and the success of your business depends on getting this right.
In order to set an effective price, a number of elements are crucial:
- What are your costs?
- How many units do you expect to sell?
- What are your competitors charging?
- How do your customers value your product?
- What is your pricing strategy?
WHAT ARE YOUR COSTS?
You need to ensure that all your costs are being covered by your sales – including overheads like rent, electricity, professional fees as well as direct costs.
Don’t forget to include your own salary in your costs. You can start off low if you need to, but realistically, you need to be taking home some money yourself to stay in business.
Failure to cover your costs in the medium to long term will result in business failure, so it is vital that you have a solid understanding of ALL of your costs.
HOW MANY UNITS DO YOU EXPECT TO SELL?
As you are pricing individual units, you need to be able to work out a cost per unit.
Be conservative in your estimations, as it’s better to over-absorb your costs than under-absorb.
If you are pricing a service as opposed to a product, work out how many hours you can bill in the year.
Remember to take account of holidays (because everyone needs time off at some point), sick days (they happen) and time spent generating sales and on admin.
WHAT ARE YOUR COMPETITORS CHARGING?
Do your homework.
Knowing what your competitors are charging will provide a sounding board for your price, and might give you an idea of how your customers will view your product / service relative to them.
You might need to be able to justify your price in order to secure sales, so it’s a good idea to have this straight in your head from the get go.
HOW DO YOUR CUSTOMERS VALUE YOUR PRODUCT?
What is your product/ service worth to them?
WHAT IS YOUR PRICING STRATEGY?
You might want to be the cheapest in the market, or view your product as the superior one in your industry, in which case you feel charging a premium is justifiable, necessary even, to attract the desired customers.
Having the answers to these 5 questions will enable you to make an informed decision about how to price your product or service. Carrying out this exercise will ensure you’ve gathered sufficient market research, and that you have a solid understanding of your product and its costs.
Unfortunately, it’s not enough to carry out this exercise once. Pricing is something that needs to be reviewed on an ongoing basis to ensure you retain your competitive edge, market share and ultimately achieve your business’s goals!
Also if you are making “Special” pricing decisions (one off orders, special offers etc), you should always ensure that your variable costs are covered by the revenue you will receive.