Pricing

Whenever I deliver my Let’s Start a Business programme I can be sure that I’ll get lots of questions about pricing.

At its most simple your pricing needs to cover all of your costs – both fixed costs and variable costs and enable you to make a profit. The costs should include the salary that you pay to yourself – most likely not the one you earned when you worked in corporate but at least a salary that enables you to pay all the bills and have some fun too.

When pricing you should consider the following:

• how you intend to position your product or service in the market
• what your target clients would be willing to pay
• the level of demand for your product or service
• the pricing strategies of your competitors

There are different pricing models – the main ones are:

• cost-based pricing
• value-based pricing
• competition-based pricing
• differential pricing
• premium pricing

Let’s take a look at them in a little more detail.

Cost-based Pricing

• Cost-based Pricing is a method commonly used by retailers and small manufacturers
• the cost of product/service is determined and used as the base, and then a markup is added.

Selling Price = Cost of Goods Sold + (Cost of Goods Sold x Markup percentage)

• some industries have norms for marking up
• there are occasions when Marginal Cost Pricing is used by a  manufacturer who wants to use spare capacity, keep employees working for example. Marginal cost pricing covers variable costs and makes some contribution to fixed costs.

Value-based Pricing

• Companies increasingly base their prices on an estimate of the market’s perceived value of their products or services
• Price is set by determining the price that people are willing to pay while ensuring that all costs can be covered.
• It’s easier to price on “value“ if your products or services are clearly differentiated from the competition
• with value-based pricing it’s essential to know who your target clients are so that you can analyse their needs and value perceptions

Competition-based Pricing

• in some situations consumers base their judgements of the value of a product or service on the prices that competitors charge for similar offerings

Differential Pricing

• This pricing method is used when different prices are charged for different group of customers. The prices can also vary with respect to time and location. The best example is mneral water which varies enormously from supermarket to corner grocery stiore, to major event such as Wimbledon to airports.

Premium Pricing

• some companies will charge more if they seek to position their product as high-end and create an aura of exclusivity.

If you would ask me what I recommend my response would be:

• know what your fixed and variable costs are and then calculate your break-even point so you know how much you need to sell to cover all your costs
• know how you intend to position your product or service in the market
• know your target clients really well – what they want, what they’re willing to pay
• know what your competitors charge
• take account of all of the above to set your prices and then go out and test them to see how much you manage to sell. If not enough to break-even then you need to adjust your pricing but also your cost base so that you can still break even and make a profit

Pricing services this is a far more tricky area and so I’ve devoted a post to  Pricing Services.

My question to you: what method do you use to price your products and why?