Setting the right prices for your business is an essential element to the success of any start-up. If you set your prices too high, then you are likely to deter potential customers from buying. If they too low, then you are likely to lose potential profit whilst also making customers think that your products are not at the same quality as your competitors.
The ideal price is an optimum price where profit can be maximised after costs have been covered.
Carrying out market research will allow you to review the market in which you will operate whilst giving you a sound knowledge of competitors and potential customers. This research will be key when it comes to setting prices.
Finding out what your potential customers are willing to pay for your products or services will be essential. By carrying out market research on potential customers and competitors, you will be able to find out how much customers are willing to spend.
If you are able to find out how much your competitors charge, then you will be able to decide on what prices you will set. If you are looking to offer a better-quality product or service, then customers may be willing to pay more. Think about restaurants and coffee shops that operate in different niches and target different customer groups whilst ranging in quality and experience. This is a perfect example where customers will pay more for a better-quality product. Never match your competitors’ price unless you know that you can afford to. Your competitors’ overheads may be lower.
Knowing your breakeven figure
As with all products and services, there is a breakeven point where costs have been covered. This will help you work out how much profit you will make and help you to decide on what prices to set. When setting prices, you need to know what your costs are.
These include costs such as materials, electricity, packaging, etc. Variable costs will be linked to volume as the more sales you make, the more variable costs you will have.
Fixed costs are known as overheads which include rent, business rates and wages. Fixed costs will remain the same regardless of volume. For example, a restaurant will have the same rent and business rates regardless of how many customers come into the restaurant each month.
Your breakeven figure will be your variable costs and fixed costs added together plus any research and development costs. This will be the figure you will need to achieve in sales to break even. Any revenue after this will be profit to your business.
Making Profit for your business
There are commonly two pricing methods that can be used. These include Cost plus and value based.
The cost-plus approach involves adding a mark up to your breakeven figure. This is usually expressed as a % of total cost. Knowing your market and what’s normal in your industry can usually help you decide what is the most acceptable margin to add. Depending on the strength of demand, if it is high then you can increase your mark-up especially if competition is low and you have a strong presence in the market. Cost-plus pricing assumes you will be able sell all units. Obviously if you have unsold units then your profit margin will be lower.
Value Based pricing takes into account how much value customers attach to a product or service. In some cases, this may be higher that cost. This type of pricing is reflected by contractors such as plumbers, electricians, contractors etc. For services, value-based prices should be structured. Call outs for out of hours will be charged significantly higher which includes weekends and holidays.
Other things to consider
Another good point to remember for pricing is charging odd numbers rather than whole pounds. (e.g., £2.99 instead of £3.00) is a popular strategy that business owners use to make prices seem more attractive. Adding VAT into your final figure might be another consideration.
There may be some products that have really low costs where you can make a much bigger margin and other products where costs are higher therefore the pricing needs to be more conservative. For products that are popular, you might want to lower price and focus on volume to drive profit margins. Also having different prices for online and shop sales may be another factor to consider.
Remember if you set your prices to low then it will be harder to increase in the future whereas setting prices slightly higher will see customers react more favourably to price reductions. Remember, market research is the key to setting the rights prices for your products or services.