The price of your products and services can be a key factor in your customer’s decision to buy from you.
Determining how much customers are willing to pay can be challenging, but pricing products and services opens in new window at an appropriate level can help your business grow.
Charging too much for your goods and services may discourage customers, resulting in lower sales.
Setting the right price level is a combination of understanding how competitors price their equivalent offerings, how much profit margin your business needs to make, and how much customers are willing to pay.
Starting a business doesn’t come with a set of instructions.
We know that understanding the many different types of financial product in the marketplace can be difficult.
Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.
Pricing during economic downturns
Setting prices can be incredibly challenging during times of economic crisis.
Increased costs, such as energy opens in new window and materials, and customers reining back spending, make pricing important.
With potentially fewer sales as households cut back on spending, 78% of small business owners opens in new window cited a rising cost of living as the biggest threat to their business, with 40% reporting that reduced customer spending has affected cash flow opens in new window.
It may be tempting to consider raising prices to protect profit and cover increased costs – but it’s worth planning carefully how to manage pricing best.
How pricing strategies work
Numerous factors can affect the price of products and services, such as:
- cost of materials
- production costs opens in new window
- prices set by competitors for similar services and products
- how much customers would be willing to pay
- variable and fixed costs, such as marketing opens in new window, overheads, and staff wages opens in new window.
Together, these can impact the range of pricing you can consider.
Different pricing approaches can be used in different ways, such as to win customers from competitors or maximise profit from sales.
Examples of pricing strategies include:
- penetration pricing – prices are set lower than competitors to attract customers and establish a position in the market opens in new window. Prices then increase slowly over time as the market share grows
- economy pricing – keeping costs as low as possible to target bargain shoppers
- competitor pricing – matching your competitors’ prices or going lower
- bundle pricing – selling individual products as single-priced bundles, usually at a discount
- premium pricing – setting prices much higher than competitors, typically linked to product or service quality.
Exploring various pricing strategies could help you decide on the right pricing strategy for your organisation.
It’s worth remembering that there are legal constraints and consequences with some pricing strategies.
For example, if two or more competitors work together to fix prices, this is contrary to UK competition law.
If one business with a dominant position in the market charges a very high price for their goods or services this could be an abuse of its dominant position under UK law.
Read our guide to nine different pricing strategies for small businesses opens in new window.
Pros of increasing prices
By increasing the prices of your products and services while keeping costs in check, you will likely see a profit increase, assuming that sales remain the same.
Increased profit can help fund future business growth opens in new window.
Additional income from higher prices means you can invest in additional marketing, more staff, and increasing inventory to continue to expand.
Some customers assume that if something has a higher price, it has a higher value.
Higher prices may feature on products with premium materials or high-end features, allowing pricing to be higher than lower-quality competitors.
Premium pricing can also be used when a brand has been established, such as a fashion brand specialising in luxury products.
Premium pricing can lead to higher profit margins as pricing is significantly higher than product cost, such as materials or labour.
Tackling cost inflation
Some price increases may be a necessity.
Increased business costs due to inflation, such as higher energy costs, mean your start-up may need to increase prices to cover costs and maintain a profit.
Cons of increasing prices
May lead to fewer sales
Raising prices may push away potential customers unwilling to pay a higher price, especially in an economic downturn.
While you may generate more revenue and profit from each sale, lower sales volumes due to price aversion can see a fall in total income, which means you are less likely to cover fixed costs such as staff wages opens in new window or rent opens in new window.
Losing market share to competitors
High pricing can see lower-priced competitors win customers from your business, resulting in an overall lower share of the market.
Hard to lower prices
Reversing a price increase can cause regular customers to feel short-changed if they purchased at a previously higher price level.
Raising prices for a short period and lowering them can introduce uncertainty about your brand, with customers potentially wary about buying in case prices fall after purchasing.
Alternatives to price increases
An alternative to raising prices is to keep firm control of costs, reducing the need to increase prices.
An alternative is to absorb as much additional cost as possible and not pass on increased costs to customers.
This may mean your business will generate less profit, but if competitors increase prices, this may increase your competitiveness in the market.
Absorbing costs requires careful forecasting to ensure your business maintains a healthy cash flow.
Explore alternatives to materials and other costs impacted by high inflation, such as seeking new suppliers or using different materials.
Read our guide to tackling start-up inflationary costs, from buying in bulk to outsourcing opens in new window.
Funding in the form of loans or grants can be a helpful tool to avoid increasing customer costs.
Always seek professional financial advice opens in new window before seeking funding.
Use technology to your advantage
Technology can help start-ups save time and money, reducing costs and the need to increase prices.
Thinking of starting a business? Check out our free online courses in partnership with The Open University on sustainability in the workplace.
Our free Learn with Start Up Loans courses opens in new window include:
- Effective communication in the workplace opens in new window
- Managing relationships opens in new window
- Succeed in the workplace opens in new window
- Leadership and followership opens in new window
Plus free courses on climate and sustainability, teamwork, entrepreneurship, mental health and wellbeing.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.