Finding out what you should charge for products, can be one of the most unfriendly things to work out. Firstly, it will not take into account how much you love an idea or ‘just know’ it should work! If you get it wrong, you’re the only person to lose out. A few thoughts on the process:
- Know the market: You need to find out how much customers are willing to pay and what competitors charge. Handmade vs bought in – charge a premium for handmade. But there’ll be a balance. This is where storytelling is so important.
- Pick a ‘way’ of pricing: There’s ‘cost-plus pricing’ which involves adding a markup % to costs; this will vary between products, businesses, and sectors. Then there’s ‘value-based pricing’ is determined by how much value your customers attach to your product.
- Get your cost price right! Include all direct costs, including money spent developing a product or service. If you cheat this, it will bite you on the business butt. Then calculate your variable costs (for materials, packaging and so on); the more you make or sell, the higher these will be. Work out what percentage of your fixed costs (overheads such as rent, rates, and wages) the product needs to cover. Add all of these costs together and divide by volume to produce a unit break-even figure.
- Work out how much you cost: This is so important for the previous point. Your wage means how much do you cost per hour. You need to be honest with how much you need to survive, but also be realistic about what your customers and business can afford.
- Think about other factors: Will charging VAT have an impact on price? Can you keep margins modest on some products in order to achieve better margins on others? Have you built in a contingency?
- Stay on your toes: Prices will not be fixed for long. Your costs, customers, and competitors can change, so you will have to shift your prices to keep up with the market. Keep an eye on what’s going on and keep with the times and trends of the customer.
Each week I’m answering a business question I was asked the week before. It’s been great so far; last week we covered one of the most important decisions you will have to make as a business owner, hiring your first employee.