How to work out what price to charge
Mon 5 February 2018 - 10:12 amSmall Business | Strategy
The price that is set for products and services is one of the most crucial decisions business owners and managers must make in a business.
Entrepreneurs, new businesses and small business often give too little thought to this highly complex matter and the consequences can be dire. Pricing requires thought and an understanding of the customers or clients, the market, the environment and your competitors. To work out what to charge consider my eight pricing rules to help you price effectively.
- Understand your position in the market
Every business, regardless of whether it is a large and established business or a start-up business, has a position in the market place. Being able to succinctly define your niche or position in the market gives you a foundation on which to base your pricing.
- Calculate the benefits to your customer or client
The product you produce or the service you provide must have some inherent benefit to the customer or client. For your customer or client, the product or service will either make more money for them, save money for them or provide them with some other benefit that is non-monetary such as warmth, comfort, safety, etc.
Making money and saving money benefits can be calculated and used as a check to see if your pricing is competitive. Non-monetary benefits are harder to calculate but they will be compared to the benefits the products or services of your competitor can provide, e.g. warmer, closer, locally made, etc.
- Think about your competition
Objectively look at your competition and determine how close your product or service is to that of the competition. The closer you are, the closer your pricing needs to be to the competition.
- Understand your costs
As well as understanding fixed and variable costs of a product or service it is also important to understand your sunk costs. Sunk costs are costs that have occurred in the past that can no longer be controlled or managed such as patents, the cost of incorporation, research and development, etc. Sunk costs should not be included in the pricing unless your product is first to market or there isn’t a substitute product.
- Price to optimise profit
A buyer of your product or service pays the price they value your product or service at. The buyer does not consider your costs. The price should however always be greater than the minimum cost to provide your product or service.
- Reducing prices is easier than increasing prices
Reducing and raising prices both contain an element of risk, however reducing prices is less risky than raising prices. Demand is likely to reduce faster if you raise prices rather than reduce prices. Price increases should only be looked at after your product or service has been in the market for a while and is established.
- Does your price match your brand?
Consider your brand and what that brand is trying to portray to the market. If your product or service is a discount or low value brand, then the price should reflect that. Conversely, if your product or service is prestigious or exclusive then the price should also reflect that.
- Nothing stays the same – including price
Over time, the market and environment where you are selling your product or service changes. These changes affect your costs and the benefit or value they give your clients and customers. Therefore, they also must affect the price. Services can normally react faster to market and environmental changes than products such as retail or subscription products.
About the author
Stephen Barnes is the principal of management consultancy Byronvale Advisors. He has over 20 years advising clients from new business start-ups to publicly listed companies and across a wide array of industries. He prides himself on quickly understanding the client’s business and issues, and synthesising problems to develop pragmatic solutions. He is also the author of ‘Run Your Business Better’. His previous contributions to Dynamic Business include Four pricing mistakes you need to avoid and Five way to grow your business faster in 2018.