The secrets to setting the right price for your products or services
Every business starts with a decision on pricing. And while this is one of the most important decisions to make, many entrepreneurs are lacking in knowledge about how to set the right price for their product. The end result is often an under-priced product that doesn’t sell well or even worse, sky-high prices from competitors who quickly undercut your offer.
Luckily, there are some simple tips you can keep in mind when setting your price which will ensure success and profitability early on:
Know your costs
The goal of setting up your business is to make a profit, so you want to charge customers an amount that equals what it costs for them to buy your goods or service. Charging less than the cost will lead you into huge losses as they buy from you. To set the price, first get a comprehensive understanding of variable costs per unit and then add on what will be profitable.
The variable cost per unit refers to all cost elements that are directly attributable to producing one unit of your product. For instance, cost of materials per unit constitutes a direct cost. So also is the cost of labor required per unit as well as other expenses that are directly and immediately traced to the making of the product.
Always make sure that you capture all costs as we usually make the mistake of saying, I live at home, so I don’t need to add the cost of rent to my product costs etc. This will hurt you in the long term when you grow, as you will be running at a loss and will not be able to pinpoint where that loss is coming from.
Markup your cost wisely
The right price for your product is determined by the cost of producing it and how much of a markup you will need to make to break even. By knowing what customers are willing to pay, you can determine the appropriate profit margin.
To find out this information, segment your market into smaller groups and look at each specific target group’s preferences. These include data driven insights as to their characteristics including their income level, frequency of purchase etc. will prove useful. Investing in some market research could be helpful to your pricing strategy.
Know your competitors
The market is full of competition. You are not the only provider, and you have to be aware of what the going rate is for your product. This also means that you should think about your competitors and see how they fare with pricing before committing to a price point.
If it looks like they’re all at a similar level or if there’s no one else in the industry then you could charge more than them, but make sure that your products are significantly better than competitors so as to justify your price.
Bringing all of these factors together will assist you in arriving at a suitable price for your product.
Test test test and more testing!
Test your product pricing with different people, especially those you do not know at all. You will get a lot of reactions and this way you will know where your price may be too high or damn too low. Never set a price below your costs – that is just crazy and an automatic own goal!
As you test your price, what you are actually doing is testing your markup, which is your profit margin set on your product. The best time to test is just before you launch your product. But testing does not end here. You need to keep testing and adjusting your prices throughout your business’s existence.
Understand your sales seasons
There are some businesses that work with seasons, like agriculture, fashion, occasions, holidays and others. It is important that you identify the high and low seasons of your business so as to adjust your pricing accordingly.
The low season is the best time to make special offers to your customers, this is a very good strategy to keep cash always flowing into your business during the slow periods. Don’t forget your discounts adjusting your profit margins on your product and not on the cost. Always cover your costs!.
Monitor your Business Environment
Another important consideration to pricing your product is continuous monitoring of your business environment and checking your profitability periodically. Changes in your business environment could warrant a shift in your pricing. For instance, purchase costs could change so also could VAT, level of competition or general economic conditions. Your pricing must always adapt to the circumstances.
The hardest lesson in business is that you can’t please everyone. Regardless of any strategies you have in place, some customers just won’t buy. Unfortunate? Yes, but it is sometimes the way things are. The good thing is that there are always other customers happy with your prices. Try these tips out and see how it influences our business.
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