Pricing your Product or Service

Cost Plus Pricing

Market Pricing

Competitor Pricing

Other Pricing Tactics

The Effects of Discounting

Now that you have an idea of what elements there are that contribute to the cost of running your particular type of business you can move on to look at a more exciting prospect.

That of selling at a profit. In other words pricing your product or service.

Most new start up businesses use cost-plus pricing (explained later) and set off trying to take some of the competitions customers by undercharging. After slaving away for months (or even years) they realise their error and put prices up. Only for their customers to get upset and, in some cases, go back to the competitors.

It is usually better for the new start business to price their product fairly either in-line or slightly above the competition. If you then decide to reduce prices to gain more business your existing customers will be delighted. Remember - no one, not even your best friend, will tell you if you are selling too cheaply. They will simply buy your product and tell all their friends.

Being in business is about making a fair profit - so let's look at some different ways of pricing to produce profit

There are a number of ways to set the price for your product or service and, as stated on the previous page, most new businesses start off by charging too little - so here are a number of things to consider when setting price

What do the competition charge for the same product or service and is it actually the same? (for instance if you offer 24 hour service and they don't, or if you give no guarantee and they do, or if they offer credit and you are unable to - then the overall package is not the same and one would expect to find a difference in price). What did your research on the marketing mix tell you about your potential customers and their buying impulses - If price was the most important thing then you may have to sell for less. However if price was not in the top 2 then you will be wasting your time having 'sale'. In fact you may even put your customers off!!

Should you consider using different mark up's on different products in your line, like a department store or supermarket. For instance higher mark up on products that move more slowly or take up space. Another example may be a plumber, or an electrician who charges low day rates to ensure a flow of business, but charges a premium for night call out - when availability is the most important factor in the marketing mix.

There are 3 main methods of working out prices - in reality your pricing should be a combination of all three.

Cost Plus Pricing

By knowing what it costs you per hour, or product, you can calculate a mark-up to add to that cost in order to generate a set level of profit per hour, or product.

The advantage of this is that you are able to calculate your expected annual profit level very accurately

The disadvantage is that it may be less, or more, than customers are willing to pay and, most importantly, some hidden costs may be forgotten and so the actual profit is less than you think (or even a loss)

To calculate the mark up percentage you need to apply to your product, or service, you will need to know the following estimated figures. Sample figures have been put in to show how the calculation works.

Estimated Annual Overheads £32,000

Estimated Annual Direct Costs £11,800 for service businesses, selling time, this is zero

Estimated Profit Required £12,000

Once you know these you can calculate the mark-up required per product, hour, day, etc. as follows:

Estimated Annual Overheads £32,000

Estimated Annual Direct Costs £11,800

Estimated Profit Required £12,000

Total Estimated Sales Reqd £55,800 this is calculated by adding all 3 together

Mark up to achieve estimated profit, pay direct costs and cover overheads is

55,800/11,800 x 100 = 473

Therefore every item you buy for £100 must be sold at £473 - in other words I must mark it up by 373%

Therefore if you buy a dress for £3.00 you should mark it up to £14.19

If you buy a tin of paint at £1.25 you should mark it up to £5.92 and so on.

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Market Pricing

Another method of setting the price is known as market pricing and is based on the results of your market research, which should tell you how much your potential customers are willing to pay for the product, or service.

"If this product were available how much do you think you would be expected to pay for it ?

"How much do you normally expect to spend on a meal when you go to a restaurant?" etc.

There are a number of areas to be considered in researching this method of pricing: Is your product more convenient to buy than the competitors? Are you open when others are not? Is your product unique, or very rare? What is the marketing mix for your particular product and profile of customer?

By looking at this information you should be able to determine a guide price for your service, or product. The intention is that the guide price will be equal to, or more than, your cost plus calculated price (otherwise you may not have a viable business).

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Competitor Pricing

Another method of setting the price is known as competitor pricing and involves researching how much your competition is charging for the same product, or service.

In order to do this you may have to telephone them for quotes, or ask a member of your family to obtain a quote. Use this price as a benchmark. It is probably unwise to price your service, or product, much higher - without a good reason.

Too high and you may lose customers - you price yourself out of the market

Too low and you are giving away profit

The main thing to look for is the fact that this price is in line, or higher, than your cost plus calculation - in order to make your business viable.

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Other Pricing Tactics

Odd Value

This is used mainly in retail and is the tactic of charging £9.99 instead of £10.00 - this may appeal to some customers, however M&S research showed that many customers in the ABC1 bracket did not like it

Loss Leaders

This involves selling some of your range of products at zero, or low, mark up in order to attract customers who will, you hope, buy more than just the discounted products.

Skimming

Involves selling a new product at a premium until everyone who will buy it (at whatever price) have bought

Penetration

Involves setting the price for a new product at a low price to capture the majority of the market before the competition get off the ground. With a significant market share you should be able to increase the price at a later date. Useful for consumable items.

Price War

This involves deliberately undercutting the competition to win market share from them. Be careful, for many new start businesses it ends up hurting you more than it hurts them. They may have a bigger cash reserve. Remember Ionica and BT? The other thing to consider is- will your customers stay with you once the price has to go back up, or will they go back to the competition?

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The Effects of Discounting

The effects of discounting can be quite dramatic, and very unexpected. for instance if you were selling a product with a gross profit of 30% and, in order to increase customer sales or beat the local competition, you decided to offer a discount of 10%, how any extra customers (as a percentage) do you think you would need? Take a guess and write your answer in the box below, then scroll down to see the answer.

 

 

 

 

 

 

 

 

 

 

 

The answer is 50% more customers!!

Did you guess correctly - a bit of bad luck if you didn't. Unfortunately you can't afford bad luck in business.

In fact, you may be better off putting the price up slightly losing some of your core customers and making the same profit (after all, that's what you're in business to do, isn't it?)

Many new businesses assume that if they sell at less than the competition they will take their customers This is rarely true and increasing your price, or charging the same, may be the most effective way of competing profitably

Consider the following when deciding a strategy If the competitors volume of sales is greater they will have less overhead to recover per sale Can the competition discount for longer than you? Will your core customers increase dramatically if you discount? You may be well advised to charge the same and offer a higher level of service

If you increased your price by just 5% you could afford to lose 15% of your customers and still make the same profit.

Now we've covered costing and pricing return to the index for the next session

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