The Ultimate Small Business Guide To Pricing Products

Pricing is key for all businesses but particularly important for small businesses that don’t have the benefit of scales of economy. If you launch your products at the wrong price, it could have dire consequences for your company and can cause long-term issues that are difficult to rectify. Charge too much and it will slow down sales. Charge too little and you may not recoup your costs and will find it difficult to suddenly increase prices at a later date. We understand how vital it is to have a great pricing strategy so here is our guide to pricing products for small businesses

Understanding your costs

Before you set any prices ensure you have a thorough understanding of all of your costs. Both direct and indirect, fixed and variable. In addition to the costs of raw materials, there are additional costs that go into the cost of each product such as the production time, packaging, delivery, and payment fees.

This becomes a more challenging task if you are selling a service as opposed to a tangible product. In these circumstances, you will need to consider what your competition is charging for similar services as well as what the perceived value is to the end user.

Adding a profit margin

Once you know exactly what your costs are, you will need to add a project margin. Once you have a target for the profit you want to make, estimate how many items you can sell and this will provide you with the profit per product.

Whilst this formula will give you the profit needed per item, the figure you get may not be realistic. In these scenarios, you will have to lower the targeted profit or think of ways to sell more products. To get an understanding of what realistic profit margins are check what the industry averages are and set your price in line with this.

It is important to remember that whilst you can use the industry average to set a profit margin, you can charge more if your product is significantly higher quality or if your product is noticeably different. Having a strong brand from the beginning will help justify the higher cost from the start.

Continue to test pricing

In order to know for certain that your pricing strategy is working you will need to regularly test. Set a price and see how it is performing for a couple of months. Look at your sales data and discover any patterns. If sales are what you are expecting or exceeding expectations then a change of strategy may not be needed. If sales are significantly lower than forecasted, you may need to lower the price. Start with a 10% reduction and measure after a couple of months. You must have each price available for a substantial amount of time in order to receive enough data to make concrete decisions.

Ask for feedback

In addition to the sales figures, don’t be afraid to ask customers for direct feedback on the price of the product. They can provide valuable information that can inform your future pricing strategy.

Different Pricing strategies

There are several types of pricing strategies you can use when you first launch a product. Here are just a few

Cost plus pricing

This is the price you get when you take the costs and add enough to the price in order to make a profit. This is a common strategy to use but depending on your brand and your profit target, it may not be the best option for you.

Value-based

As we discussed earlier when discussing a service, one pricing strategy is basing it on the value the end user perceives the product or service will provide them. For example, luxury handbags are priced significantly higher due to the value the consumer gives the designer label. It is the brand that is providing value more so than the materials used. This method is often used when a purchase is driven by emotions or if the product is scarce.

Price skimming

Also known as milking, this method involved charging a higher price to start off with, then reducing it over time to make the product available to the wider market. This is a common strategy for the technology industry, for example, the latest iPhone.

Premium pricing

In some cases, people respond well to products that are at a higher price. It can reflect the quality of the product and provide a sense of exclusivity. This is a popular method if your product or service has a competitive advantage and is a common pricing method at premium restaurants, hotels, or in the fashion industry.

Competitive Pricing

If your product is very similar to others in the marketplace you could look at the competitors' pricing and charge slightly lower in the hope that customers will opt for the best deal.

Bundle pricing

If you have a range of products that complement each other then you can bundle the products together and offer a slight discount. This is a great tactic for items that make good gifts or if you have particular items of stock to get rid of

Penetration pricing

This is where you enter the market with a great low price as an introductory deal. After the introductory period, the customer will need to pay more to carry on. This is often a good strategy for services but only if the end users get value from their product. If customers are not willing to pay the higher price, sales will suffer quickly.

Psychological pricing

This method is about making products appear cheaper than they are. For example, £2.99 seems significantly less than £3.10 even though there is only an 11p difference. Another example is sticking to round numbers such as £10. Some studies have shown that people respond well to round numbers and perceive it as higher quality, with £9.99 being more of a discount brand.

This method completely depends on what your brand is and how you want to be perceived by customers.

Having the right pricing strategy for your small business is vital as getting it right will result in more customers and ultimately more profit. However, there is a lot to consider before deciding. Get a true understanding of your costs, your competition, your perceived value, and your customer’s buying behaviours before you decide on a figure. Once you know this, you can pick a pricing strategy that is the best fit for your brand.