Changing your pricing could double your profits – or it could be your ruin. If you price too low, you will throw money away needlessly but price too high and you will lose customers. There are three basic ways of setting your price:
Cost based pricing – total all costs involved and add a percentage profit to the total
- Competitive pricing – research the marketplace and pricing against your competitors
- Customer based pricing – your perception of what the customer is willing to pay (pricing by demand)
Before you set your price it is very important to know exactly how much it costs you to provide the product or service you are offering. This will be made up of two factors:
- Fixed costs – these stay the same regardless of sales eg. rent, salaries, utilities
- Variable costs – these are directly related to volume of sales eg. goods, materials, transport costs, casual staff costs
Know your costs
* Know the mark-up for your business, eg
fridges – cost plus 25%
branded clothing – cost plus 135%
ethnic jewellery – cost plus 250%
* Remember hidden costs – these are the other expenses that are often overlooked so the true margin may be far too small eg. bank charges, accountants fees, stationery, networking costs, holiday pay, waste materials
Dangers of under-pricing
- It is far easier to reduce prices than to increase them. If in doubt, try higher prices first
- Low prices often go hand-in-hand with poor quality and poor service. Is this the image you want to create?
- For small businesses, competing on price is often a big mistake. What you offer are benefits like convenience, personal service and special skills. That is why customers buy from you. Don’t under-price in order to ‘build up sales’- focus on building up profits instead – people don’t just buy on price
Pricing by demand
* Consider using different margins for different products like a department store does for goods – higher margins on products with a low unit costs or slow turnover or products which take up a lot of space
* Prices may be variable according to the season eg. ski wear or even weekly eg air flights at Christmas
* Prices may be variable due to how great the demand eg. plumbers often offer a low daytime price (to ensure a full work load) but charge heavily for emergency call-outs (when desperate customers will pay the earth)
Vanishing opportunity
* Remember perishable goods are worthless after their sell-by date and also services can be perishable, if you do not sell your plumbing skills today you have lost a day’s work
* Many products become obsolete as new improved models are available or if fashions change
Discounting
* Consider discounting to match the competition eg. by offering the standard trade discounts
* Use discounts to encourage early payment or cash payment
* Sell off old stock (and improve cash flow) by using clearance discounts
* Encourage larger orders with a bulk discou
nt – it costs the same to process/invoice a large order as a small order
* Encourage customer to buy from you during your quiet period with an off-peak discount
Premium Product / Service
Over 20% of people will pay more for a premium service. Think of First Class flying, not buying the house wine in a restaurant, paying extra for a high-priority service. Try and incorporate one higher price product/service into your range and monitor what happens. It may be a good option to try, if you are reluctant to increase the price of your basic products but want to test the market.
Caroline Aitken | 01732 465666 | caroline@acorncommunications.co.uk | www.acorncommunications.co.uk
