This weeks blog and video continues with pricing, moreover How you should price your products, and how to calculate your product prices . In addition you need to know this when developing pricing strategies for your business. Our video goes through this So, if your business sells things, if you are a retailer, a manufacturer there is a different approach compared to services.
Overall, some things stay the same. Pricing must play its part in
- Meeting your business and marketing goals
- Make your profit on a sustainable and long-term basis.
Whatever price you choose will not be a one size fits all. You will have different pricing approaches to use within your business toolbox. Purpose and objectives drive approach.
Your pricing strategies for your business
What to consider before setting prices
- Determine an accurate costing for the product or project (see the section on costing a project).
- Estimate the target profit required for the product, project, or year to make the business feasible. This can be determined by a percentage—such as a 20% profit on each item sold— or a value—such as £20,000 profit being required for dividends in the financial year.
- Research your competitors’ prices.
- Consider the customer value of your product or project.
Different pricing strategies
There are a lot of factors to consider for How you should price your products, and how to calculate your product prices. When looking at pricing strategies for your business include:
- the income you need
- how much your target market is prepared to pay
- the perception created through your pricing
Armed with this initial information, you will see there are different pricing strategies for your business. Here are some approaches.
Cost plus pricing
Let’s check out why it’s popular. Firstly, businesses like straightforward, don’t we all. Cost plus is simple in one sense. You figure out what something costs you, add your gross profit, together and hey presto, your selling price.
Secondly, it’s consistent. You’re always going to be making that same level of profit per each item that you sell. Thirdly you will recoup your costs – assuming you sell!
There are drawbacks to it though. Your focus moves away from controlling your costs, efficient and challenging them. Cost plus pricing makes you less competitive, potentially unaffordable and make you out of step with your competition and peers.
Understanding and tracking costs
Different goals require different pricing strategies for your business. They all need to contribute to generating profit. Moreover, understand what costs you have and the different ways to look at them understand and use them to run your profitable business. Check out our previous blogs, podcasts, and broadcast to find out more.
You need to know here and now what your costs are. Use the power of a Digital and Cloud accounting system as your number eco system. It does the heavy lifting of keeping a record of what you’re earning and spending. Information is grabbed from your website, your bank, your Stripe and Paypal accounts, EPOS systems, to name but a few.
Premium pricing
When you have a unique or high-quality product, premium pricing could be an option. This involves setting the price at a higher rate than your competitors. Customers often consider higher prices to mean superior quality, so setting the prices higher will help customers to perceive your products as having a higher value.
Market penetration pricing/loss leader
Where the price is set at a rate considerably lower than your competitors, the hope is that customers will buy from you instead of their usual supplier. To do this, however, the price may be less than the cost to you, resulting in you making a loss. This is why it’s sometimes called a loss leader. Making a loss initially or on one product, with the aim that customers will return to buy more from you in the future is a risky policy. It should only be undertaken if you can be confident to cover the losses with other funnds.
Economy pricing
This is where a product is made as simply and cheaply as possible and priced as low as possible, while still making a profit. This is the policy used by some of the cheaper airlines as they offer a no-frills product. They then charge for additional services, like food and drinks on board or hold luggage, but customers have the option of whether to use these or not.
Price skimming
This policy will work for a product that initially has little competition. It involves setting the price high initially, then gradually reducing it as more competition comes into the market. It is a risky policy, and the business must ensure it is always monitoring competition and customer feedback. Where the price is not amended on a timely basis you will find yourself losing all your new customers.
Bundle pricing
Bundle pricing is where more than one product or service is bundled together and offered at a lower price than purchasing the items individually. This encourages customers to buy more than one item;. Take care when offering discounts, make sure there is profit still to be mad with the price.
Pricing Products or Services in Business
How to price your product
Lots of things will have an influence on How you should price your products, and how to calculate your product prices. It’s important to understand the factors that can influence the prices you set.
Ensure you have put as much research into pricing as possible, as guesswork can be a very expensive mistake! Setting a too-low or too-high price will put severe limits on your business and disrupt your cashflow. Below are some of the established techniques for pricing.
Pricing by competition
In markets where customers are sensitive to price or where there are multiple suppliers offering the same product, you will have narrower margins and price your goods or services by matching them to those offered by your competitors.
Mark-up and margin
You determine your selling price and profit either as a percentage of the cost price of the product or service (called mark-up), or of the sale price (margin). Use our FREE online calculator and give yourself options
Break even
This is where you calculate the point at which your income from sales and your costs are equal (your break even point) and add your profit margin to your unit cost to set prices. Reduce the number crunching and use our FREE online break even calculator and give yourself options
Perception
Perception pricing is dictated by the market. You need research to gauge the value perception of your product or service. Ask customers what they think your proposition is worth, and price accordingly.
Rule of thumb
Rule of thumb is a basic formula most suited to businesses whose services require bespoke prices each time, such as builders or plumbers. For example, a plumber might charge twice the cost of the fixings plus labour or twice the cost of the labour plus the fixings, whichever is greater.
You will gain new customers via growing your customer base and this can be achieved by offering discounts.This is one way as to how to calculate your product prices, but it its inconsistent and has shortcomings.
There are many factors to consider when creating your pricing strategy, you must be flexible and adaptable as the market changes and demand fluctuates. Research your competitors and be realistic, make re-pricing decisions carefully as they are difficult to recover from if you make a mistake.
Conclusion
Knowing How you should price your products, and how to calculate your product prices is daunting. It is a combo of numbers, figuring out your goals, understanding your customers and a dose of psychology. We’ve shown you a glimpse of some pretty need to know things about pricing your products. If you want your business to carry on, generate good cash flow, sustain, survive then you need to know how much you should charge for your products. If you don’t do this then you may be charging too little, or even too much. .
Get in touch with us to see how we can help you with your pricing and all your accounting and tax needs. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.