How to price your product is a question that comes up fairly regularly with our clients and in our members group. It can be a tricky question on a mathematical front, especially for those of us for whom finance isn’t our strong point. But in addition, it can also lead you to something of a mindset minefield that brings with it questions like: ‘Will people pay that much?’, ‘Is what I’m offering really worth that?’ and ‘Why would people actually pay me that much?’.
But that said, if you take a strategic approach to your pricing, and work through all of the different aspects, you should reach a point where you feel comfortable.
How to price your product – where to start
There are lots of approaches and models out there when it comes to pricing your product, and it’s important to research your particular industry or market. However, there are a number of basic considerations that we all need to take into account, and this blog is designed to take you through the various stages.
1) Research your market
This is theoretically a fairly simple, but potentially time-consuming, one. Equally, it’s one that’s absolutely crucial. To put it simply, you need to research your market to find out what your potential customers are buying, but also what your competitors are charging (and therefore what people are paying). It’s important too to research both the upper and lower ends of your market, and figure out where your own business sits in between.
2) Think about your business goals
This is where how to price your product fits in to your overarching business strategy. Before we can look at how much we are going to charge for a specific product or service, we need to think about the bigger picture. What are you actually looking to achieve in terms of turnover and profit margin? What does that mean as a ballpark for the number of sales you’re likely to need to make? And most importantly, how does that fit in with any personal financial commitments that you might have? As well as telling you how much money you might like to make over the course of the year, it should also tell you how much revenue and profit you need to make.
3) How much does it cost to create or deliver your product?
To answer this one, you need to think about the bigger picture and start making a list! Here, we’re aiming to establish exactly how much it costs to get your product out of the door – your variable costs. For example:
- Raw materials or ingredients
- Wholesale cost of products
The last point above – time – is an important one, and one that’s easily forgotten or under-valued. If you make a product, for example – how much time do you need to do that? Give yourself an hourly rate, and factor that into your costs. Likewise, if you deliver a service on a by-the-hour basis, are you done and dusted in an hour? Or do you actually need another half an hour for follow-up activity? In which case, 90 minutes, and not 60, need to be factored in to your pricing.
4) Other costs
When trying to figure out your pricing strategy, it’s important to factor in not just your variable costs, but your fixed/overhead costs aswell. These are the costs that you’ll have to pay, no matter what. For example, do you have premises in which you make your products or equipment that you need? How about a website? Maybe a car if driving is an important part of your business?
How you calculate your fixed costs is slightly dependent on the nature of your business. But for example – if you know that you can make and sell 1000 products per year, and it costs you £100 per year to rent a piece of equipment, you need to add 10p to the price of every product to cover it.
As well as the operating costs, you also need to factor in any other financial obligations, such as loan repayments.
We all need to add a profit margin on to our basic costs, but the percentage that you choose will depend on your industry and on your business goals. Therefore, it’s worth doing some research to see what is most appropriate and if you can, to try to work out what margins your customers are making. This article from Tide is a useful starting point. It’s also worth remembering that this profit margin may change over time and that this becomes part of your strategy. For example, in the early days, your profits might be quite low as you’re focussing on quality, reach and reputation, but over the longer term, efficiencies such as buying materials in larger quantities, may lead to stronger margins.
As we mentioned above, it’s important to know that once you decide how to price your product, you don’t have to stick to it. It’s really important to review your prices regularly, both as a whole, and in terms of the component parts. For example, is the profit margin you set actually realistic? Or did some unexpected costs come up during the year that you hadn’t accounted for? And in terms of the market as a whole, are you competitive? Or have you set your prices too high? Or too low? Setting your prices too low can be just as damaging as too high, so it’s important to keep checking.
7) Iterate and refine
Our final piece of advice when it comes to how to price your product is don’t be afraid to make changes! People expect prices to change – with inflation, following a change of supplier or even just to reflect market conditions. But remember also that pricing doesn’t always have to go up. If you find a cheaper supplier, your customers will welcome and celebrate you if you pass some or all of the saving on to them. Equally, if you have a lot of ‘old’ stock lying around and that’s costing you money, decrease your prices to move things along more quickly!
As small business owners, we know how difficult it can be to decide how to price your product. But don’t be concerned. Take your time to work your way through the basic calculations outlined here, and then after some research, tweak and refine your model to reflect your industry and the markets in which you operate. You can also read more about finance in our Definitive Guide to Starting a Small Business. And if you’re still not sure, get in touch with us!