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Pricing: The basics

Businesses exist to trade and sell their goods and services to customers in the outside world. The monetary value of sales is normally expressed as quantity (units, items, hours etc) x price. The customer will only order a quantity of goods or services when the price is right and he or she feels they’re receiving value. Therefore one cannot underestimate the importance of setting the price at the right level so the customer is happy with the value they are receiving. Overcharging (what a rip-off!) will always bring about a negative reaction from your customer and possibly, will mean no more orders. Pricing that is perceived to be reasonable and justified must be the aim of the game.

So how do I price the goods or services I want to sell?

  • Cost Plus – taking into account all your unit costs – both material and labour (direct costs) and overhead costs -lets say we calculate that at £10 per unit-and then, multiplying that by a factor of say 2.5, will give you a selling price of £25 and probably a satisfactory Gross Margin and Net Margin.

  • Market Pricing – find out what your given market and the competition are pricing similar products or services at, and then set your prices at around the same level if this seems right. If you are selling coffee, you need to price it the same-ish as others in your neighbourhood, but remember if you’re selling something utterly unique, then you might not need to worry about what others are doing. You must ask if this will give you satisfactory margins – regardless.

  • Test Pricing – if you are not sure at what level to price your goods or services do your Cost Plus exercise and then test the pricing on your first customers to see what reaction there is. Your customer’s reaction will quickly tell you whether you have pitched prices at the right level. Ask them to be honest. They might tell you you’ve not charged enough – it does happen!

  • Loss Leader Pricing – if you are selling a variety of goods or services you may want to entice your customers with lower prices on certain items to entice them into buying others at higher prices. Retailers often use this method. But you need to be sure that you’ve done your sums on this and also make sure that it isn’t only the loss leaders that sell! Also if you f**k up, you can always put it down to a strategy of having Loss Leaders!

  • Premium Pricing – are the goods or services you provide unique in the marke? Are they of above average quality? Is the brand you are promoting in some way exclusive or iconic? Is your customer service exceptional? All of these factors and more allow you to charge a premium on the normal retail prices. For example, on the high street, women’s handbags can range from less than a hundred pounds to thousands of pounds. Clearly quality of product is a factor, but what else allows such high prices to be charged? If you hand-blow a wine glass, etch it, package it with love – this is to be charged at a premium to the imports we find everywhere.

  • Discount Pricing and Special Offers – offering discounts based on the volume of items bought by a customer will always be attractive. Special Offer pricing, especially if your business is seasonal will help to move stock and maintain income levels. But you need to be careful and selective as too many Special Offers or substantial discounting may indicate to the market that you may have financial problems or will train them to only shop when a inevitable discount is available.

  • Contractual Pricing – this applies more to services, but a long-term contract which gives certainty of income over the period of the contract, can be very attractive to businesses and may allow you to reduce your normal prices to your customer.

Useful Tips:

  • Incorrect pricing can kill your business. Do not underestimate this. Take real time to do your sums first, to ensure profitability.
  • Be realistic when setting prices – the price you set will often determine the volume of good or services the customer will buy.
  • Model various pricing levels on a spreadsheet first and see what it does to your bottom line.
  • Get financial help if necessary to set up a simple pricing model – they are easy to set up! Promise.
  • Don’t continually change you prices based on different factors.  As increases in your costs, will mean that your returning customers will not have certainty in terms of price and thus, trust in your brand. Change prices if possible say annually or semi annually and remind customers what exceptional value these prices are, despite the increases.

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