Setting prices too high can drive your customers away, but charging too little could leave you in the red. Learn more about pricing strategies in a small business and find out how to set the right price for your product or service...
Setting the right price for your product or service is essential to your business’s success. To come up with appropriate numbers, you need to look at three key factors:
- your costs
- potential demand
- what your competitors are charging.
Calculating costs
There are two basic kinds of costs you need to calculate – your variable costs and your fixed costs.
Variable cost is the price per unit of your product, and takes into account factors like:
- the cost of manufacture
- packaging and shipping
- import duties
- credit card fees
- warehousing costs
It is always a good idea to make sure your pricing covers your variable costs.
You will also want to take into account your fixed costs, such as staff salaries, rent, utilities, insurance, loan repayments and marketing costs. Charging more for your product than your variable costs allows you to cover your fixed costs.
How to make sure you cover your costs
You can check if your pricing is on track by multiplying your total price per unit by the number of units you estimate you can sell in a year. The figure you get should cover all fixed costs and variable costs, and still leave you a reasonable amount of profit.
Keep in mind that while your variable costs will often go down the more you sell, you should be conservative in your sales projections. This will lessen the risk that you won't be able to cover all your costs.
Potential demand: understand your market
It’s essential to know what customers are willing to pay. You can get an estimate by looking at competitors’ rates. Carrying out market research or holding focus groups can also help you establish a reasonable price.
You should also keep in mind how you plan to position your product in the marketplace. There are many situations where you can charge more than the competition.
- If you’re selling a luxury product, pricing below the competition means customers might think your product is inferior.
- You can charge more for a unique product that is difficult for competitors to imitate.
- Many customers will pay more for if you offer excellent customer service.
- Developing a well-known brand means customers will pay a premium for your product.
Know what your competitors are charging
If your customers are likely to buy your product or service based mainly on price, looking at what your competitors are charging will help you avoid pricing yourself out of the market.
Charging less than your competition may look like a good way to gain market share but there are some potential pitfalls. If your competitors are larger or better established, it is likely their costs per unit are lower than yours. It may be a better idea to develop other selling points like better customer service or an improved product.
Varying your pricing
You might want to consider using price discrimination to maximise your sales – charging different prices to different customers. For example, you may offer a discount to students on a product that is usually too expensive for them, in the hope of reaching a wider market.
You will also want to consider potential fluctuations in the market. For some small businesses, demand is seasonal. Raising your prices during peaks or offering discounts during off-seasons may be a good pricing strategy if demand for your product changes significantly throughout the year.
How uSwitch for business can help
Read our budgeting guide for small businesses