Getting the price right

Price tag

Do you tear your hair out trying to put a price to a product or service? Here's some savvy advice which could help set you on the right track

You've got a great idea for a business, a service or product you've decided to launch - but how do you go about setting a price? On the one hand, you risk pricing yourself out of the market and losing valuable sales by going in too high, on the other, you don't want sell your product or service for less than it is worth.

Pricing is not an exact science, but there are several accepted methods of arriving at a figure which can be useful, either on their own or in combination. It's worth bearing in mind, though, that pricing is determined most of all by what potential customers will pay, irrespective of what method you use to reach your price - and that perceived value can differ significantly from actual value.

However you price your goods or services, you are likely to want to do so in a way which earns you the maximum return on your outlay. It's worth spending some time arriving at a price which suits your and your market's needs.

The methods

The most common methods for determining price are the cost-plus model and the competitor-model. The latter is based on what your competitors charge for theirs similar product in the same market. Finding out what they are charging is often a matter of making a few calls, or getting someone to make them on your behalf. You will want to be sure you are comparing apples with apples though, as there may be many variables which influence the price.

The other common method is to add all the costs involved - material or products, labour, postage, overheads and anything else - and then add a percentage mark-up to reach a final price.

Both these methods are valid and have their uses - and it's a good idea to price your goods and services both ways to help you arrive at a ballpark figure. However, don't just blindly apply the formula - some of your competitors may be about to go out of business because they can't sustain enough orders to maintain their low margins, and you don't want to repeat their mistake!

So, what is it really worth?

Another way to decide on your price is to find out what people will pay for your product or service, and what things would add value. This is by far the best way to decide on your pricing, although it is wise to work out comparative pricing according to the two methods above so you know what kind of premium you may be charging and what your competitors are doing.

The most common way to gather this kind of market intelligence is to hold formal or informal focus groups. This could simply involve taking half a dozen customers or potential customers out to morning tea and discussing your ideas, and asking what they would be prepared to pay for your product or service. It's important that you outline the product or service carefully, and that the sample you choose is representative. Investigate different options too - you could easily find that by adding one or two small additional services or features, or for instance the ability to pay monthly, that you can lift the product or service into a different category with a higher margin.

In determining your price you will want to define, and bear in mind, the market you are targeting and the quantity you can sell. For instance, a water bottle aimed at school kids may sell in greater volume, but at a lower margin, than a similar product aimed at hikers. The latter would no doubt be all aluminium, have a sipper nozzle, a belt clip and perhaps even a cover, while the school model would be indestructible and made of brightly coloured plastic.

Add value to increase price

Using the above example, mothers who have replaced a multitude of drink bottles because the cap has gone missing may be prepared to pay more for a model which has a tie holding the cap to the bottle, while hikers may pay a premium for an insulated model which keeps drinks cool when they are sweltering in the sun. The premium paid for these additional features is usually much more than the minor additional cost of manufacturing them and you should take highly desirable features such as these into account in pricing. You can also add perceived value by packaging your product differently, or bundling a service and presenting it in a great. glossy brochure.  

Remember, you can apply these rules to services as well as products. If in doubt, it is wise to start with a higher price and reduce it later, as it is much more difficult to increase your price. If you are really unsure, it may pay to introduce your product or service, marked at a certain price but offered on an "introductory special" for a limited time. If you have been selling your products or services and believe they are priced to high for the market, rather than drop the price, see if there is a way you can come up with a "value-added" alternative - for instance, giving away a second bottle or a small additional item for a limited period of time.

It's never easy to determine your price, but it is fundamental to the profitability of your business so it's important to get it right. Do your homework, set a price, be creative with your offer, and monitor the response. That way, you can change your price to suit the market if you need to, but most of the guesswork will be eliminated.

Topics: 

  • Startup
  • Finance

Comments

Great article Heather, will be posting to our facebook group a lot of our Mums struggle with pricing!

Janine Ogg's picture

Thanks for sharing with others Janine. People do struggle with pricing and it can make such a difference to your profitability that it's worth getting it right. Glad if these pointers can help.

Heather Douglas's picture

great article.  Thanks for sharing.  Sometimes you just need to try different pricing and get a feel for what people are willing to pay and what value you are adding.  

At the end of the day you need to test and measure the results.  You should be collating the results and making a decision based on facts no assumptions. 

Matthew
AppointmentReminder

Newbee's picture

Add new comment

To prevent automated spam submissions leave this field empty.
Heather Douglas's picture

I started Bizbuzz (or HomebizBuzz as it was called then) in 2000, when I worked from home and realised there was nowhere for home businesses to find relevant information, nor a community of like-minded people to tap into for support, or just a chat. A few years later, Smallbizbuzz was born, and...