How to price a product in 5 simple steps

Small Business Advice 1 March 2018

If you’ve started a small business, you’ve probably chosen a prime business location and mapped out your complete marketing strategy. But more important than any of these things is how you price your products and services.

If you haven’t done this already, don’t panic. Most independent business owners starting out on their first venture have no idea how to price their products. Learning how to go about doing this can mean the difference between a struggling startup and an expanding enterprise.

 

Here are 5 ways to price your products, no matter your business type.

  1. Look at competitors

The first thing you’ll probably be tempted to do is look at the price of competing product products. This is a great place to start. From there, take some time to think about whether you’re more high end or low end than the majority of your competition.

If you’re on low end, you may be able to steal their customers by undercutting their current prices. Be careful not to go too low or people may get the impression that your products are inferior. If you’re targeting the higher end of the market, make sure you communicate this to your customers. Once you do, you may be able to charge more while highlighting your distinct benefits.

 

Ask yourself:

  • Am I offering more or less than my competition?
  • If I’m charging more, is it clear what the customer is getting in return?
  • How can I offer customers more value for money?
  • Which review sites and forums will give me an idea of what customers really value?

 

  1. Think about your business type

Another way to price your products is to break down your offering into parts. First, look at your base product. Now look at the additional items or elements that make up your entire offering.

Ask people what they’d be willing to pay for your base product and how much extra they would pay for the extras. Once you know this, find out how often they’re willing to pay this amount. This will give you an estimate of the product lifespan per customer (also known as product life cycle) and how to price it.

 

Ask yourself:

  • Is repeat custom important for your business? If so, you may want to keep your prices low.
  • Am I selling something that’s trending for the moment or will it stand the test of time?
  • How can I position a range of products to direct prospects to the most expensive?

 

  1. Consider your financial restraints

The amount of money you have coming in (earnings) has a direct relationship with the amount of money going out (costs). A good way to price products that keep your company in the black is to look at your business costs.

If you have a brick and mortar store, complete with rent, bills, staff salaries and other commitments, these are called overheads. These are largely fixed costs that you must pay to keep your business running. Consider the cost of making or buying your product and whether this will increase or decrease over time.

Once you’ve worked out your fixed and variable costs, you can clearly see how much you’ll need to break even. But how much should you add to each product to make a decent profit? Use this profit calculator to work it out.

 

Ask yourself:

  • How much do I need to pay back to investors or myself?
  • When will my business become profitable?
  • How quickly can I grow my streams of income? And your profit margins?
  • Have I calculated all of my variable costs including manufacturing, shipping, packaging and marketing? And all of my fixed costs including rent, admin, overheads, salaries, bookkeeping?

Once you add up the cost of manufacturing, packaging and delivery you can use a margin calculator to work out your profit and the markup of each product (the percentage difference between the cost of the product and the price you sell it for).

 

  1. Look at your product benefits

 

If you take another look at your main competitors, you might be able to spot areas for improvement. This could be providing extra convenience like staying open until late or bring first to market with an update/upgrade. You might even discover a customer segment or place where your product is scarce.

As well as analysing the current competition, you’ll also want to look at whether it’s easy for other people to set up a similar business to you. You might think your customers will stay loyal forever but when an incumbent arrives with a shiny new version of your product, things could change.

If the barriers to entry are high, you might feel more comfortable raising your prices, as it’ll be difficult for customers to find the same thing elsewhere.

 

Ask yourself:

  • Can you search for manufacturers and see how popular your product is with other businesses?
  • Is it possible to patent your product, utilise a special skill or leverage brand loyalty that will let you enjoy a wider margin.
  • Are there big risks with similar, lower priced products?

 

  1. Try a few tactics

Some of the above will help you to price your small business products. But before you go off and put them into practice, there are a few additional tactics you’ll want to try. By taking advantage of some of these tried and tested methods, you could stand to boost your earnings even further.

 

Price fluctuation

Product demand rises and falls throughout the year so consider altering your prices to match it. This can be done by the day, week, or year.

Smart pricing

Studies have shown that small changes in price can make big differences in people’s reaction to it. Therefore, you can increase the likelihood of a purchase by pricing an item £7.99 instead of £8.00.

Bundling products

Bundling high-value products with high-perceived-value products gives customers the impression they’re getting a great deal. Here’s where you can combine the base product with additional elements to make the bundle look plentiful. Use the margin calculator to work out exactly what the gross margin is for each element.

Loss leading

Ever tried taking advantage of a sale item and ended up buying non-sale items too? That’s loss leading; an effective way of luring customers into your store or onto your site. Use a loss or break even on one item to draw customers in and make up that loss on full price items.

Anchor Pricing

Anchor pricing is a psychological tactic where you display the original price alongside the reduced a sale price. This takes advantage of the user’s cognitive bias and helps them see the savings more clearly.

Keep your prices low

If you’ve read the above and you’re still unsure about pricing your products, there’s still hope. if any of the following are true, you’ll want to keep your prices low compared your nearest competitor:

  • You’re introducing a new product to market
  • You’re targeting a completely new customer base
  • Barriers to entry are low for competitors

 

Whatever you do, make sure you cover costs using this cost calculator and be sure to include research and development, materials and packaging, and overheads such as rent, rates, wages and equipment.

Leave a Reply

Your choice regarding cookies on this site

We use cookies to optimise site functionality and give you the best possible experience.

We have placed cookies on your device to help make this website better.

You can use this tool to change your cookie settings. Otherwise, we’ll assume you’re OK to continue.

For more information visit our Cookie page


Necessary Cookies

These are cookies that are required for the operation of our website.