Setting the price of your products or services is one of the most important decisions you’ll make for your business. It’s also one of the toughest. Discover the ways you can set pricing with our expert guide.
Figuring out pricing is complex. Get it wrong, and you could end up either undercharging and not covering your costs or overcharging and losing sales to competitors.
Costs can be higher for a new business because they lack the scale of established larger companies, but you need to balance attracting customers with making a profit.
That’s why working out your costs, understanding pricing strategies, knowing your unique selling point (USP) and researching your competitors are all vital.
Read our competitor research guide for start-ups for advice on assessing competitors.
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Choose a pricing strategy
You have various pricing options open to you.
Cost-plus or mark-up pricing
The simplest option is cost-plus or mark-up pricing. Decide on a percentage mark-up – known as ‘margin’ – and add that to your costs to give you a price.
Bear in mind that there are limitations to using this method because it doesn’t consider changing market conditions such as competitor pricing.
Value-based pricing is another option.
This involves working out the perceived value of your product or service to a customer and how much they are willing to pay for it.
If a customer comes across your offer and that of a competitor, which one are they willing to pay more for?
This is where factors such as your USP, your brand’s strength, and the quality of packaging and ingredients come into play.
Value-based pricing can be particularly effective for sectors where customers make purchases based on emotion, such as fashion and beauty products.
One strategy used by many new businesses entering an established market is to offer lower pricing than competitors to raise awareness and attract customers and then increase prices as you build market share.
Project vs hourly rate pricing
For service-based businesses, pricing on value is about understanding the client’s needs and showing how you can deliver results.
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.
Understand your break-even costs
You must be careful not to price products or services below what it costs to produce them.
To avoid this mistake, you must understand the different types of costs and know your break-even point.
There are two types of cost: fixed and variable.
Fixed costs are those your business incurs regardless of how many products it sells or customers it has.
Examples of fixed costs include:
- premises costs such as mortgages and rent
- employee salaries
- insurance and loans
- utility costs for electricity, gas, broadband and water
- depreciation of assets such as computers and IT equipment
Variable costs, on the other hand, vary depending on how many products you sell, for example as you sell more products you’ll need to buy more materials to meet demand.
Examples of variable costs include:
- the costs of materials such as ingredients for a food business
- commission-based wages
Once you know your fixed and variable costs, you can then add an appropriate margin on top to arrive at a price.
Read our guide to how to calculate a break-even point
Competitors and pricing
Understanding what your competitors charge is vital when working out your prices.
This will ensure you know the going rate for your product or service.
It’s a good idea for your prices to be in line with those of your competitors unless you’re adopting the strategy of pricing lower than competitors to win market share.
You can charge more if your product or service has clear differences, such as better-quality materials or is more effective.
Begin by identifying your competitors. There are two types: direct and indirect.
- Direct competitors offer similar products and services and compete for the same market share.
- Indirect competitors offer products or services that overlap with yours but do not directly compete for customers.
To find out what competitors charge, look at their website and third-party marketplaces where they sell, such as Amazon, eBay and Etsy.
Look for details of prices and check how they communicate the value of their products and services.
Many service-based businesses publish rate cards for download on their websites.
If you’re competing for public-sector contracts, you can often find details of the value of contracts on government websites.
Other options for finding competitor prices include price monitoring software and customer surveys.
Ask your customers what they are willing to pay for your product or service and ask them to name competitors they’ve already purchased from.
Read our expert guide on how to test your product idea before launching
Raising or lowering prices
There may be times when you need to raise or lower your prices, but you should always consider how it will affect your profitability and sales volumes before making any change.
If your costs increase, you may need to raise your prices.
Be honest with your customers, and use email, blog posts and social media updates to explain why prices have increased.
Raising your prices gives you an opportunity to re-emphasise the benefits of your offer.
Being open and transparent can strengthen your customer relationships.
Releasing a new product or new version of an existing one is another way to increase prices.
Customers are often willing to pay more for a premium or limited-edition item if they perceive it to be of greater value.
You may also want to increase prices alongside extra benefits such as free delivery or gift wrapping.
Additional benefits included in the price can result in more sales. If a customer selects an item on your website, but then shipping is added, they might be less likely to purchase than if no extra charges are added before they click the buy button.
Always be wary of cutting your prices.
Low prices can suggest poor quality or value.
For many customers, purchasing decisions aren’t solely based on price.
However, if you’re looking to sell off old stock or end-of-line items, discounting can work.
If your costs reduce, you might want to consider passing on the benefits to your customers without eating into your profits.
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).
Monitoring your prices
Pricing is constantly evolving, and you should avoid staying stubbornly fixed on one price.
Regularly monitor your competitors’ prices. You need to know if and why they raise or lower what they charge.
You may need to adjust pricing to compete or improve your marketing to re-emphasise your business’ benefits.
You should also keep checking in with customers.
Send regular customer satisfaction surveys, and if you get lots of comments about a price being too high, investigate why.
It could be that you aren’t communicating the benefits well enough.
Regularly measuring your business’ pricing and performance is good practice.
Track which products sell the best and provide a good margin.
Monitor different prices and pricing strategies to understand which work best for different customers and different products or services.
Adjust your prices accordingly.
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Disclaimer: While 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.