Setting product and service prices, and understanding margins and costs, is an essential aspect of running a successful small business. So many new business owners either undersell themselves or set pricing that will never earn them a living that it’s a major cause of business failure.
Determining the right balance between profitability and competitiveness can be challenging, but, with the right research, understanding and thought, you can establish fair and sustainable pricing. In this guide, we will look at understanding your costs, researching the market, and setting margins and prices for your products and services, empowering you to make informed decisions and optimise your business’s financial performance.
Understand Your Costs: Before setting prices, it’s essential to have a clear understanding of your costs. Calculate all direct and indirect costs associated with producing and delivering your product or service. Direct costs may include raw materials, labour, packaging, and shipping, while indirect costs encompass rent, utilities, marketing expenses, and administrative overheads. By knowing your costs, you can avoid pricing your products or services too low, ensuring that you cover expenses and generate a reasonable profit margin. Calculating this is straightforward, add all your indirect costs together for a month and divide by the number of products you will sell in a month. Then add the direct cost of making one of the products, you now have the total cost of supplying the product. If you’re not sure,
Research the Market: Conduct thorough market research to identify your competitors offering comparable products or services. Find out what they charge paying attention to factors such as quality, brand positioning, customer experience, and added value. This research will help you gauge the appropriate price range for your offerings and enable you to position your business effectively within the market.
Determine Your Value Proposition: Identify and articulate the unique value proposition of your products or services. What sets your business apart from the competition? Do you offer superior quality, exceptional customer service, unique features, exclusivity or are you the cheapest? Understanding your value proposition will help you justify a higher price point, allowing you to differentiate yourself in the market and attract customers who appreciate and are willing to pay for the added value you provide. Not every customer is looking for the cheapest product, but many will be looking for value for money.
Consider Target Market and Customer Behaviour: Understand your target market and their buying behaviour. Determine the price sensitivity of your customers, considering factors such as income levels, demographics, preferences, and the perceived value of your offerings. Price your products or services in a way that aligns with your target customers’ expectations and affordability while still maintaining profitability.
Set Clear Profit Margins: Do this based on your business objectives, industry standards, and financial requirements. Consider factors such as growth plans, reinvestment needs, and long-term sustainability. Ensure that your pricing strategy allows you to achieve these goals while remaining competitive in the market. For most business owners there is no point in having an excellent product, selling a million units a year, but only earning minimum wage because the profit margin is so low.
Calculate Markup and Margin: Markup and margin are two common methods for determining prices. Markup is calculated by adding a predetermined percentage or fixed amount to the cost of a product or service. Margin, on the other hand, represents the difference between the selling price and the cost, expressed as a percentage. Experiment with different markup or margin percentages to find the balance that suits your business. It’s important to strike a balance between generating profit and remaining competitive to attract and retain customers.
Monitor and Adjust Pricing: Setting prices is not a one-time event. Regularly monitor your pricing strategy and evaluate its effectiveness. Pay attention to market trends, changes in costs, and customer feedback. If necessary, be prepared to adjust your prices accordingly to maintain competitiveness and profitability.
Consider Pricing Strategies: Explore various pricing strategies to optimise your pricing approach. Some common strategies include:
- Cost-Plus Pricing: Adding a markup percentage to the cost of production.
- Value-Based Pricing: Setting prices based on the perceived value to the customer.
- Competitive Pricing: Adjusting prices to match or beat the competition.
- Skimming Pricing: Setting higher prices initially and gradually lowering them as demand evolves.
- Penetration Pricing: Setting lower prices initially to gain market share.
Setting product and service margins and prices for your business requires careful consideration. By following the steps outlined in this guide, you can develop pricing that aligns with your business objectives while ensuring profitability and competitiveness. Remember to regularly assess and adjust your prices based on market conditions and customer feedback. With a well-thought-out pricing strategy, you can maximise your business’s potential and achieve long-term success.
If you’re not sure, Juggle! is here to help, contact us for a free consultation and see how we can help you get your pricing right.