The Easy Guide to Smart Pricing Strategies. How to Price for Profit!

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Pricing is one of the key drivers in making a decent profit. But pricing your product or service can be really tricky, there are so many different pricing strategies out there. It’s part art and part science.

You have your fantastic new product or service all ready to sell but how on earth should you price it? Your sales price can have a huge effect on the amount you will sell.

On the one hand, you don’t want to price it too high and put your customers off. On the other hand you don’t want to price it too low and make your customers or clients think that what you’re offering is of a low quality. Worse still, if it’s too low you won’t even cover your costs let alone your mortgage!!

It’s a bit of a Goldilocks situation. I’ll show you have to price your product juuuuust right so that you make a profit…

Firstly, let’s look at the factors that will influence how you price your products. Then we’ll dive into how you can come up with the right price for your product, looking at the various methods out there.

The 4 influences on how you price your product or service

There are four general categories that will affect your price. Grab a piece of paper or get your laptop and jot some ideas down under the four headings below for YOUR business:

1. Cost

Before you can price anything, you need to know how much it cost you to make. Remember, your ultimate business objective is to make a profit, so you need to at least cover your costs.

2. Competitors

If you are selling a unique product or service then you will have more control over the price you sell at. BUT if you are selling something very similar to another business then you will need to consider their price when setting your own.

3. Customers

How much will your customers be willing to pay for the product or service that you are selling? Do your research with potential customers beforehand. Even better, test out your price point with a mini launch. Sell at a local fair or market to see how much interest you get and have a chat with your customers.

4. Your Company objectives

What is your aim as the business owner? Are you hoping to maximise your sales by pricing your product as low as possible to beat the competition? Are you aiming to maximise your profits as much as possible? Do you have a target profit that you need to make in order to pay your mortgage?

Ok, have you written down something under the four headings above? This gives us our starting point and an overview of what your Pricing Strategy (ooh get you, fancy!) will be affected by.

How should you price your product or service?

It is essential you know how much it costs to make or provide your product or service. Once you know this you will know what your break even point is.

Your break even point is when you cover all of your costs and your profit is zero. This means the sales price or retail price for your product is the same as the price it costs to produce.

But, you do not want to be breaking even!! You want to have a business that you love whilst simultaneously making a decent profit and totally #winningatlife!

But, it’s good to have an idea of your break even point so that you know whether you could offer a discount for example. Say your sales price is £5 but you know your break even point is £3, you know you could offer up to a £2 discount and still cover costs.

Cost–based pricing methods are often a good place to start when deciding your sales price. Sooo guess what I’m going to suggest, yes, you’ve guessed it let’s start there…

Cost-based/Mark up Pricing

To start with you will need to work out your cost price i.e. what it cost to make your product or provide your service:

Calculate your costs

1. Estimate your direct costs per product. These are the costs that can be directly linked to making that product i.e. materials

2. Estimate your annual indirect costs i.e. rent, electricity, phone, internet, gas, staff, insurance.

Forecast how many sales you will make

3. Forecast the total number of sales you will make annually.

4. Multiply the number of sales by the direct cost per product.

5. Add to the total annual indirect costs to get TOTAL annual COSTS.

Calculate your break-even point

6. Calculate your break-even point by dividing total costs by total unit sales.

Include your profit i.e. what you need to live on

7. We want to work out a Sales Price that includes a profit margin i.e. we want to price to make a profit! Choose profit amount you need to make say £5K.

8. Add to the annual TOTAL COSTS calculated in step (5). Divide by total sales units.

Finally…calculate your sales price

9. Sense check the sales price and compare to competitors and customer expectations. Use what you have written down after working through the 4 C’s above.

Remember that in the case of a Sole Trader you wouldn’t put your own wages down as a direct or indirect cost. Instead, any profit made is your salary (in the UK).

Different pricing strategies i.e. other ways to price your product

Market price (also called going rate or competitive pricing)

This is the main type of pricing and one of the easiest to set if there is an established customer base for your product or service. Have a look at your competitors’ pricing and use this as your price point.

Example: I decide to launch my own brand of Prosecco. I know from my own personal research (it’s tough but someone had to do it!) that there are already a few companies selling Prosecco so I would price my product around the same amount.

Price cutting/penetration

You set the prices low in order to get more sales, often selling at a loss. This might be used when you first start your business to attract customers.

Example: I open an Accountancy practice and offer to complete Tax Returns at half the price of my competitors. I will make a loss at that price but it will attract customers.

I can increase the price the following year and hopefully those new customers will ask me to do other accountancy work for them (which I will price so that I make a decent profit margin).

Price Skimming

To start off, you set your price high to “skim off” customers who are willing to pay more in order to have the product sooner.

You might decide to lower the price later. The idea is you take advantage of the current customer demand.

Example: there is a new BB Cream out in the U.S that promises that when you wear it people won’t ask “Are you ok, you look tired!”

I need this product IMMEDIATELY so buy it from the one company that is selling it at an extortionate price in the UK.

Perceived Value Pricing

In this instance, instead of looking at price from a cost perspective, you look at price from a customer perspective. What value do they place on your product or service?

Example: having a strong brand will dramatically increase the perceived value a customer places on a product. A good example of this is the price of a branded item versus the supermarket own brand. You may be able to add a price premium.

Target costing

This is where you set a target sales price for a product you would like to launch. The idea being that if you know what your target sales price is and you know how much profit you want to make, the difference is the target cost.

Example: Cadbury come up with Cadbury Caramel (obvs this has happened already but this is just an example ok?!). They know they have to sell it around the same price as a Dairy Milk.

They also know they want a similar amount of profit to the Dairy Milk so let’s say 50p is the sales price, they want 10p profit per bar so they have to be able to make and market the Caramel for 40p. Mmmm…chocolate!

Promotions and Discounts

You should also think about whether you will be offering promotions or discounts for your product or service.

Promotions and discounts can be a great way to develop some excitement around your business and encourage new customers to try out what you have to offer. There are various methods you could use:

  • Quantity discounts – if they buy in bulk
  • Trade discounts – when you sell to a middleman rather than the end customer.
  • Seasonal discounts – Christmas, Easter, Valentines, Black Friday. The possibilities are endless!
  • Temporary promotions – perhaps when you first launch a product.
  • Discounts for paying cash – saves you from having to worry about credit control.

Just remember, you don’t have to offer all of these if any! Promotions and discounts hit your profit so they are a great idea but just check that they make financial sense.

Sales Pricing Top Tips

  • It is much easier to lower your price after you have launched a product than it is to increase your price and justify that increase to your customers.
  • I can almost certainly guarantee that you are under-pricing yourself. I bet (unless you have a competitor selling a very similar product or service) you are selling your product too low due to your under confidence when starting out. Remember that you have a fantastic product or service so believe in yourself. You are offering something of value that will improve your customers’ lives.
  • The sales price is the single easiest way to increase your profit from Day 1.
  • Always keep an eye on what the competition is doing. Once you have completed the Pricing for Profit worksheets you might find your sales price is less than the competition. So why not try pricing your product higher and review it from there?
  • Offer a couple of different products at different price points to tempt your potential customer. A product at a lower price point creates an easy entry point as there is less risk when spending a smaller amount. Then when they are suitably impressed (as we know they will be!) they will come back for more.
  • You could also offer different prices for the same product. For example, if you have a food stall and you have a pitch at a farmers market you may want to charge a slightly higher price to these more discerning customers than you would if you sold the same thing down your local high street. Always consider your market and the type of customer you will be selling to.

Regularly review your sales price

Just because you have set your price doesn’t mean you’re stuck with it forever! I can’t stress enough how important it is that you review your prices on a regular basis.

Why?!

  • Your cost price might have changed. If it’s gone up then you need to cover these costs. If it’s gone down then you could reduce your price and possibly make more sales or leave as is and make more profit!
  • Your competitors may be pricing their products differently and you may want to follow suit. This is likely to have a knock on effect to your sales. Always be aware of what the competition is doing!
  • You may not have got your Pricing Strategy right the first time – The Price Is Wrong in this case! Pay attention to the amount you’re selling. If your sales are lower than you hoped or expected it may be due to the sales price.

Recap…

I hope this has helped you to choose a pricing strategy and therefore a retail price that you‘re happy with.

So start by researching your market and considering the 4 influences on how you price your products or services – cost, competitors, customers and your company objectives.

Calculate your break even point i.e. how much it actually costs to make or provide your product or service. Any sales price over and above your break even point will generate a profit.

Consider the different methods of pricing and which is best for your business. And don’t forget to think about and factor in promotions and discounts.

Try selling different products and services at different price points to tempt new customers. Regularly review your pricing strategy especially if your costs have increased.

And whatever you do don’t under price yourself!! Be confident in your awesome product or service!

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