Getting the pricing right on your products is one of the most important decisions you’ll make within your business. It can be used not only for profit, but for competitive strategies and exploiting market opportunities too. Because pricing contributes to the perception of your brand (company), you should ensure that your product pricing is consistent with the other elements of your business. But how should you really go about deciding on a price? And how will it affect your business?
Pricing your product(s) correctly will influence your business in a variety of ways, such as your return on investment. When you first started your business, you may have invested your own money or taken out a loan; getting your product pricing right will allow you to recover that investment much quicker. It also has repercussions on your brand image: how much you charge can alter how you’re viewed by your customers. A low price can lead to the assumption that your product(s) are low quality or badly made, whereas a higher price can give assumed prestige and status. However, go too high and you’ll be seen as a rip-off.
Setting your prices too high or too low can do anything from limiting your growth to collapsing the entire business. As a general rule, the higher your prices the lower your demand; if prices are put up, sales will fall. Although, higher prices can also mean higher sales, when done in the right way at the right time.
It can be very tempting to underprice your products in an attempt to create competitive prices but, as I mentioned before, with underpricing comes the assumption that your products are cheap and low-end quality. It can also cause a few long-term problems as you will have a thinner margin to cover costs and still make a profit. If you depend entirely on low pricing strategies your business will require a constant stream of high-volume sales. This being said, it’s still completely possible to sell cheap and make a profit. Using things such as promotional deals allow you to create a higher status for your business beforehand, giving you bigger profits and a potential for even bigger sales when your promotions are in play; the sale gives the customer the impression that their time is limited and are likely to spend more money in the belief they’ll be saving money in the long run.
Overpricing is just as dangerous as underpricing. Consumers can be very price-savvy, and an overpriced product might not sell if your competition has a better price. Customers want to see the product pricing high enough to believe it’s a good quality item, but they also want to feel like they’re getting a good deal. If your pricing your product above your customer’s willingness and ability to pay, your sales will rapidly decrease. The middle ground on this can be vastly different, depending on who you are targeting. If your targets are at the upper-end of the class spectrum then you can put your prices higher with less chance of pushing them away, but too low and your product will be considered “cheap”. Whereas if your targets are on the middle to lower end of the spectrum, the high prices will be an absolute no-no, but you can utilise competitive pricing more to your advantage.
Pricing strategies can sometimes be really complex, but the basic rules are quite clear. For a start, all of your costs and profits must be covered. If your pricing doesn’t cover these, then you’re not making money and if you’re not making money, you’ll go out of business very quickly. If you do wish to lower your prices, the best and most effective way to do this is by lowering your costs. This way, you won’t be eating out of your profits. You can make the same amount and if/when you’re ready to return your products to their original prices, your profits will increase.
Once you’ve set your price(s), don’t assume your work is done. You should be reviewing them frequently to ensure they reflect the market demand, profit objectives, response to your competition and costs. You can change your prices at any time! This isn’t a one-time deal, so don’t be afraid to lower or higher them here and there to assure you’ve accounted for all of these aspects.
Here’s a sample equation with examples of costs to help you understand how to calculate your prices simply:
Cost of materials (£50) + cost of labor (£30) + overhead (£40) = total cost (£120)
Total cost (£120) + desired profit (20% of sale – £30) = required sale price (£150)
And just the numbers:
(£50 + £30 + £40) + (20% of sale) = £150
Pricing your products really isn’t as hard as it seems once you’ve gotten to know your target audience(s) and you’ve taken into account your costs + desired profit. If in doubt, you can always do some extra market research (such as a survey) to get a better understanding of what your audience is willing to pay for your product(s). Product pricing can affect your entire business, so listen to your audience and try to find a price that works for both them and you. Make sure to keep an eye on pricing trends in your market area and adjust your pricing strategy accordingly. Don’t be afraid of change, sometimes it’s necessary to ensure The Price Is Right