Setting the price of your products or services is one of the toughest decisions a small business needs to make. Our handy guide will help you set competitive pricing that attracts customers and makes a profit.
Setting pricing is tricky – especially if you’re running a small business start-up. Small businesses lack scale and experience when it comes to setting prices, and this lack of scale means supply costs can be more expensive than for established businesses, while a lack of experience makes setting the right price feel like a gamble. Yet without an established brand, a small business has to set pricing that strikes the balance between attracting paying customers and turning a profit.
Business price involves juggling a number of factors – how much other similar products and services cost, the uniqueness of your business’ services or products, your costs and overheads – and all the while generating spare cash to invest in growing your business.
Know how competitors price their products
Take time to learn what your competitors charge for similar services or products – this is known as ‘what the market will bear’ or ‘the going rate’. Generally, your pricing should be in line with competitors. If your product has differentiated attributes – such as more luxurious components, finer craftsmanship or offers more value for money – you can adjust pricing upwards. If your business isn’t well known, you can try pricing lower than competitors to win customers in the early stages until you built your brand.
Know the cost – or break even – pricing
It’s important that you don’t price products or services below how much it actually costs to produce them. It may seem sensible to cut prices to win customers, but cut too low and you’ll eat into your bottom line. Identify your break-even point – this is the cost to your business to deliver your product, including all manufacturing, delivery, marketing and overheads such as staff wages and premises costs. Once you know the base cost of your products, you can then add a margin – such as 10% – to your products, making sure they’re still in line with what the market will bear.
Understand the value of your services
If your start-up business is mainly focused on delivering services – such as creative services, design or programming, or administration services such as consulting – it’s a good idea to know how much value your services will bring to your client and price accordingly. Setting pricing this way means meeting with the client and understanding their problem, then showing how your service can solve their problem, such as creating a brand for the client that helps attract a high value customer.
Bundle and discount pricing
Pricing can be used as a mechanism to encourage new customers to buy more products, so consider a strategy of bundle or volume discount pricing. This means you’ll accept a lower margin for bulk purchases or repeat business, but it will help you achieve volume sales. This can help with cash flow in a new business, and can be used in services (such as a lower monthly fee if a customer retains your services for six months) and products (such as a discount for buying ten or more products at the same time).
Project vs hourly rate pricing
Services businesses are often faced with the challenge of pricing by the amount of work they produce for a client, or by the value of a project. If your business offers services that could be paid by the hour, then work out how much you would need to charge by the hour to break even, including all costs. Billing by the hour is good for small businesses with new clients, as a demanding client can eat into time with meetings, revisions and requests. A project rate is good for efficient businesses with established clients – it means your business will earn more than an hourly rate.
Test and learn with pricing approaches
It can be hard to get pricing right from the start, so continually monitor pricing and performance – know which of your products drive volume and a good margin, and look to make more of these. Be prepared to test different prices and pricing strategies, learning which work for different customers and products, then set your pricing accordingly.