Chapter 4 - The Price is Right - Pricing your Product

Are you feeling proud of your accomplishments so far after reading the first three chapters (links below)? You should! Great job! Each of these chapters is centred around making informed decisions. This chapter continues that focus with Pricing your Products/Services.

Are you ready to set the right price for your product/services?

In the realm of running a successful small business, few choices are as crucial as setting the right prices for your products and services. The correct pricing strategy can mean the difference between thriving and just getting by. This practical guide provides a clear, step-by-step approach to help you set prices that reflect the true value of your offerings while ensuring profitability.

Understanding Your Costs - Pricing your product

Before exploring pricing strategies, it's essential to fully grasp the costs associated with your products. This involves more than just calculating material expenses; consider all aspects, including:

Fixed Costs: These are expenses that remain constant, irrespective of sales volume. For example, rent, utility bills, and employee salaries contribute to your fixed costs.

Variable Costs: These expenses fluctuate based on production levels. Increasing production will lead to higher costs related to materials, labour, and distribution. For instance, if material costs rise by 10% due to increased demand, that directly affects your pricing strategy.

Total Cost: Add both fixed and variable costs to understand the overall expense of bringing your product to market. For example, if your fixed costs are £1,000 and your variable costs per unit are £5, and you produce 200 units, your total cost would be £2,000.

This results in total cost of £10 per unit. But this is not your price - its your cost. Simple right?

Clarifying these costs establishes a solid foundation for building your pricing strategy.

Analysing the Market

With a clear understanding of your costs, it's time to examine your competitors and market conditions.

Identify Competitors: Research similar businesses and their pricing strategies. For example, if you sell handmade jewellery, check what others charge for similar products. If competitors are priced at £30 for similar offerings, you need to consider this when setting your prices. Undercutting (selling for less) might attract more sales, but your profit would be reduced per unit.

Understand Customer Behaviour: Observe how customers react to various price points. You might conduct surveys asking, "What price would you be willing to pay for this product?" This feedback can guide your decisions.

Market Demand: Assess demand for your product. If demand is high, you may be able to charge more. For example, many small bakeries increase their prices by 15% when they experience a surge in wedding cake orders during peak wedding season.

A thorough market analysis ensures you find your unique position and competitive edge in the market.

Choosing a Pricing Strategy

Its time to select a pricing strategy that aligns with your business goals. Consider these options:

Cost-Plus Pricing: Calculate your total costs and add a markup percentage. For instance, if the total cost of a product is £10 and you add a 50% markup, your selling price would be £15.

Value-Based Pricing: Set prices based on the perceived value to customers. If your product solves a significant problem for customers, you can charge more. A business coach might charge £100 an hour because they are coaching twelve people at the same time in a facilitation and this saves the company several hours of downtime on training individually.

Penetration Pricing: Start with a low introductory price to attract customers quickly, then gradually increase it. This could help you gain significant market share. For example, some streaming services began with low monthly fees to build a subscriber base.

Choose a pricing strategy that aligns with your brand and resonates with your target audience.

Setting the Right Price

With your groundwork in costs, market analysis, and strategy, it's time to determine the actual price.

Range of Prices: Establish a price range that covers your costs and remains appealing to customers. For instance, if your production cost is £10, consider pricing between £20 and £30 to maintain an attractive margin.

Psychological Pricing: Use pricing techniques to enhance attractiveness. Ending prices in .99 often makes them appear lower. For example, instead of pricing a product at £30, price it at £29.99. You may also consider "anchor pricing," which involves displaying a higher price alongside a discounted one to create value perception.

Test Prices: Launch your product at multiple price points to identify what resonates best with consumers. You might discover through testing that a price of £31 generates more sales than £29.99.

By thoughtfully determining the final price, you position yourself for market success.

Evaluating and Adjusting

Setting your price is just the beginning. Regular evaluation and adjustments are essential for continued success.

Sales Analysis: Keep a close eye on your sales data. Are your pricing strategies bringing in customers? Analyse profit margins to ensure they align with your goals. If you find that sales drop significantly at a certain price point, it may be time to re-evaluate your pricing.

Customer Feedback: Continually engage with customers to gather feedback about their perceptions of your pricing. If customers express that your prices are too high, consider adjusting them based on this insight.

Market Trends: Stay informed about market trends and economic conditions that may impact your pricing. Regularly revisit your pricing strategy to ensure it remains effective. For instance, if raw material costs rise, it may be necessary to adjust your prices accordingly.

This ongoing evaluation allows your business to adapt in a rapidly changing market.

Final Thoughts

Effective pricing of your products or services effectively is a blend of creativity and analysis, all while keeping your customers' needs in focus. By understanding your costs, looking at the competitive landscape, choosing an appropriate pricing strategy, setting the right prices, and continuously evaluating your strategies, you can create a successful pricing approach.

Use these steps as a practical guide for your business journey. Thoughtful pricing not only helps you sell effectively but also fosters lasting relationships with your customers, helping them recognise the value of what they receive.

So, get started! Developing a smart pricing strategy can transform your business and pave the way for sustained profitability and growth. Enjoy the journey to effective pricing!

More Chapters in this series

Chapter 1   - A Business Idea - Lets Make it Happen

Chapter 2  - Target Your Market

Chapter 3   - Land Your Brand

Chapter 4   - The Price is Right

Chapter 5   - Lets Get Down to Business

Chapter 6   - Its All in the Name

Chapter 7   - Location Location Location

Chapter 8   - Financing your New Business

Chapter 9 - Recruitment

Chapter 10 - Law and Taxes: Play it Smart, Stay Sharp

Chapter 11 - Kick off Your Business with a Bang

Chapter 12 - Financial Review for your Small Business

Look out for the next chapter.

the Lead Coach is always available, just fill in the contact form on the website www.theleadcoach.biz