If your prices are too low then you are in danger of not only scaring away potential customers who view a ‘cheap’ option with suspicion but also cutting into your profit margins. Alternatively, if you set your prices too high, there is a danger that you will scare off customers unwilling to pay such a high price.
Put together an optimum pricing plan that allows you to attract the right levels of custom, covering all of your expenses and leaving enough to make a healthy profit.
Research Your Market
Market research is vitally important for your whole business strategy, but essentially so when it comes to setting prices for your service or product. If you take the time to understand your customers and what excites them and implores them to buy products, you’ll gain a good understanding of what your product should be about and what price range you should set it within.
Look at your competitors. Are they selling similar products to you? What are their prices and is the product range selling well? Once you’ve established an accurate assumption of these figures you can work out a relevant price for your own product or service.
You must always take into account your own situation with regards to overheads. Your competitors will have a completely different set of circumstances to you with regards overheads, experience of the market and experience of key staff. By taking a broad sample of competitors’ prices you can get a clear idea of a suitable range to aim for, but never just go straight for the same price as a direct competitor, unless you know for certain that you can afford to do so.
Learn to Cross the Line
By breaking down all of your overheads you will have an accurate cost assessment for your business. You should know a round-about figure of how much you need to sell in order to break even. Put together your variable costs (materials, packaging, utility bills) together with your fixed costs (rent, rates, wages) and your research and development costs. This figure will be your break even figure.
But what about profit?
This approach involves marking up a product in order to break even. The mark-up is usually a percentage of the total cost and it helps if you have an in-depth knowledge of your market place. If demand is high and your costs are low, or competition is scarce, this can be an effective way to push up your chances of breaking even and making a profit. The potential worry with this approach is that if you do not manage to sell every unit within your product range your overall profit margin will be much lower.
Value based pricing principles require you, as the service provider, to have a knowledge of how much value your potential customers would attach to your product or service. This perceived value could be at a much higher value than the cost of said product/service.
If it is a service that you offer outside of traditional, daytime, working hours for instance, then you have more chance of making customers believe that you have a right to charge a higher fee. It is a more difficult pricing structure to come up with as it is based on your belief and passion in a service rather than something tangible that you can accurately calculate, such as a the cost of buying the components of your product or service from suppliers.
There are a number of other pricing issues to take into consideration, such as the application of VAT on to your products, and how this will affect your pricing decision.
One tactic that companies use to make a product a more attractive proposition is to sell it as £9.99 rather than £10. As part of your pricing strategy you might wish to consider other ways in which to entice your potential customer, such as having low profit margins on some products. This would allow you to be more expansive with your decisions on other product prices.
You can also be a bit creative with sale prices, variations with offline and online sales (if you have the capability for both) and a different price for different locations (if you have stores available to purchase from in different locations).
Evaluate and Change Fast
In an ever changing marketplace keeping on top of your pricing can be the vital decision making process that keeps you ahead of the game. If you’ve already started your product or service at a low price and need to change it to a higher one to cover costs, you may struggle to convince customers that a price hike is something they should agree with.
It is much easier to start at a higher price rate and work back down if you are looking to entice customers back to your product.
Regularly conduct market research on your own product, service and prices, as well as the competitors within your marketplace. It is ideal that you remain open to fluidity in much of your business practice, as change does occur. As long as you are always fully aware of your fixed costs and overheads, the rest of your strategy can remain fluid when necessary to ensure your survival and that you thrive.
Start-Up Business Advice
The best thing any start-up business owner can do it to gain as much help and expert advice as possible at this crucial stage. Take into account how to minimise overheads, by potentially purchasing the services of a virtual office orbusiness address, leaving you with more room to manoeuvre with your pricing structure.
Take the time to read through our guides for start-up businesses. There is plenty of advice and help available so don’t be frightened to take the plunge.
Our Free Download section includes a Cashflow Forecast and a Profit & Loss Forecast which will help you get started.
You can also join our Google+ Community “Startup in Britain” which is packed with help, resources and articles to get you started. Use it to get tips, advice and start building your network!