Whatever your type of business, at some point you’re going to have to decide how to price the product
Whatever your type of business, at some point you’re going to have to decide how to price the products and services you sell.
Many new business owners will tend to pick prices that feel right and go from there, but this can lead to goods being underpriced, which will damage profits, or overpriced, which will damage sales and slow growth.
Pricing strategies can get pretty complex as businesses expand, but the basic pricing principles are quick to pick up and easy to apply.
Price your goods to cover your costs
You need to price you goods in such a way that they’ll cover all the costs of your business. Assuming you want to make profit, best way is to treat intended profit like a business cost and price your goods accordingly.
If you’re planning on offering your customers a lower price than your competitors, or give them great deals, the best way to manage that responsibly is to find ways to lower your costs – then pass on those savings to your customers.
And if you think you’ve already lowered you costs as far as they can go, check out this cost-cutting guide from Squarespace – there’s almost always ways you can run a tighter ship.
And you should review your prices frequently to make sure they accurately reflect their value to you and your customers. Though in theory, price is set by consumer demand, in practise you’ll find that demand is sticky, and people who are buying your products will keep buying them at a higher price.
Cost-plus Pricing
The most common pricing method among manufacturers is known as cost-plus pricing, where the price of a good is the cost of producing it – so the cost of materials, labour and overhead – plus desired profit.
If you manage a restaurant, this might be the price you go for, or you might use it to set the minimum price you can charge for a meal. In that case, you’d calculate the cost of ingredients, labour and overheads and use them to work out how much your meals cost to make.
Things are less simple for retailers and wholesalers. A product is sold a number of times before it reaches the consumer – and the manufacturer’s price will be lower than the wholesaler’s, which will in turn be lower than the retailer’s.
This allows every link in the chain to make some profit – or at least cover their costs. As a rule here, the more of product you buy, the cheaper it is.
Competitive Pricing
However, most businesses will end up using competitive pricing, which is the price set by the market. If you’re selling mobile phones, your price choices is limited by the typical going rate of a phone, both in online and offline markets.
Here it’s best to use a price that is not too distant from that your competitors charge for the same product. If you need to boost sales, you can to undercut the opposition (though you risk a race to the bottom), or if sales are strong, you may want to raise profits by charging a premium for some added value – be it your exemplary customer service, quick delivery or strong warranties.
