Are you sure that you’ve priced your products well? Or maybe you’re at the beginning of your business journey and you’re wondering what the best way to do it is. This blog will teach you how to price your products based on different pricing strategies so that you can avoid making a mistake from the early days.
In addition, you need to know how to price your products when developing pricing strategies for your business. If your business sells things (if you are a retailer or a manufacturer), there is a different approach to pricing services.
Overall, some things stay the same. Pricing must play its part in:
- meeting your business and marketing goals, and
- making a profit on a sustainable and long-term basis.
Whatever model you choose to price your products will not be a one size fits all. You will have different pricing approaches to use within your business toolbox. Purpose and objectives drive the approach.
Things to consider before setting prices
- Determine an accurate costing for the product or project.
- Estimate the target profit required for the product, project, or year to make the business feasible. This can be determined by a percentage – such as a 20% profit on each item sold, or a value – such as £20,000 profit being required for dividends in the financial year.
- Research your competitors’ prices.
- Consider the customer value of your product or project.
How to price your products
Lots of things will have an influence on how you should price your products, and how to calculate your product prices. It’s important to understand the factors that can influence the prices you set.
Ensure you have put as much research into pricing as possible, as guesswork can be a very expensive mistake! Setting a too-low or too-high price will put severe limits on your business and disrupt your cashflow.
You will always need to take into account the following:
- the income you need,
- how much your target market is prepared to pay,
- the perception created through your pricing.
Armed with this initial information, you will see there are different strategies about how to price your products. Here are some common approaches.
Cost plus pricing
This method is very popular. Why? Firstly, it’s pretty straightforward. Cost plus is simple. You figure out what something costs you, add your gross profit and hey presto, your have your selling price!
Secondly, it’s consistent. You’re always going to be making that same level of profit per each item that you sell. Thirdly, you will recoup your costs – assuming you sell!
There are drawbacks to it though. Your focus moves away from controlling your costs and challenging them. Cost plus pricing makes you less competitive, potentially unaffordable and makes you out of step with your competition and peers.
Keep track of your costs
Understanding what costs you have and the different ways to look at them is at the core of running a profitable business.
You need to know here and now what your costs are. Use the power of a Digital and Cloud accounting system as your number eco system. It does the heavy lifting of keeping a record of what you’re earning and spending. Information is grabbed from your website, your bank, your Stripe and Paypal accounts, EPOS systems, to name but a few.
Premium pricing
This is an option that you’d use when you have a unique or high-quality product. How to price your products with it? Simply set the price at a higher rate than your competitors. An added bonus is that customers often consider higher prices to mean superior quality. So, setting the prices higher will help customers to perceive your products as having a higher value.
Penetration pricing
If your aim is to draw the attention of the market, then you could choose this pricing model. It involves setting the price considerably lower than your competitors. Naturally, this is done in hope that customers will buy from you instead of their usual supplier. To do this, however, the price may be less than the cost to you. As a result, you’d be making a loss. This is why it’s sometimes called a loss leader. Making a loss initially or on one product, with the aim that customers will return to buy more from you in the future is a risky policy. Price your products using penetration pricing only if you can be confident to cover the losses with other funds.
Economy pricing
This approach is only used when a product is made as simply and cheaply as possible. Therefore, you price your products as low as possible, while still making a profit. Some of the cheaper airlines use this policy as they offer a no-frills product. They then charge for additional services, like food and drinks on board or hold luggage, but customers have the option of whether to use these or not.
Price skimming
When you start out with little competition, you can use this model to price your products. It involves setting the price high initially, then gradually reducing it as more competition comes into the market. It is a risky policy, and the business must ensure it is always monitoring competition and customer feedback. If you don’t amend your price timely, you will find yourself losing all your new customers.
Bundle pricing
The name is self-explanatory. You can apply this model to selling multiple products in a bundle. When doing so, you’d offer the bundle at a lower price than purchasing the items individually. This encourages customers to buy more than one item. It’s frequently used which I’m sure you’ve noticed. However, when you price your products using it, make sure there is profit still to be made with the price.
How to price products or services
Pricing by competition
In markets where customers are sensitive to price or where there are multiple suppliers offering the same product, you will have narrower margins and price your goods or services by matching them to those offered by your competitors.
Mark-up and margin
You determine your selling price and profit either as a percentage of the cost price of the product or service (called mark-up), or of the sale price (margin). Use our FREE online calculator and give yourself options.
Break even
Price your products or services by calculating the point at which your income from sales and your costs are equal (your break even point) and add your profit margin to your unit cost to set prices. Reduce the number crunching and use our FREE online break even calculator and give yourself options.
Perception pricing
How to price your products or services with this model? Well, perception pricing is such that is dictated by the market. You need research to gauge the perceived value of your product or service. Ask customers what they think your proposition is worth, and price accordingly.
Rule of thumb
Rule of thumb is a basic formula most suited to businesses whose services require bespoke prices each time, such as builders or plumbers. For example, a plumber might charge twice the cost of the fixings plus labour, or twice the cost of the labour plus the fixings – whichever is greater.
You will gain new customers via growing your customer base and this can be achieved by offering discounts. This is one way how to calculate your product prices, but it is inconsistent and has shortcomings.
Conclusion
Knowing how to price your products, and how to calculate your product prices may seem daunting. It is a combo of numbers, figuring out your goals, understanding your customers and a dose of psychology. We’ve shown you the different approaches to how to price your products or services. If you want your business to survive, generate good cash flow, and thrive, then you need to know how much you should charge for your products. If you don’t do this, then you may be charging too little, or even too much.
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