Deciding how to price your services and products is a crucial step in setting up a business. Price is one of the main factors potential customers consider. The amount you charge can greatly affect sales and gross profit.
If you price too low, you risk not making a significant profit and losing customers seeking a high-quality product or service. But if you charge higher prices, customers may turn to more affordable competitors instead. By implementing a reliable pricing strategy and adjusting to the economic climate, you can keep both you and your customers happy.
What to charge for your business
Many businesses use a ‘cost-price’ model to ensure they cover their costs and still turn a profit.
This pricing method involves calculating the overall cost required to create and ship a single product or provide your service once. Consider the variable costs involved, such as materials, supplies, and packaging, and your overhead fixed costs, such as employee wages, rent, and bills. Once you have calculated the amount you would need to charge to break even, you add a mark-up percentage to determine the profit you’ll make. This is typically between 10-50%.
However, it is also important to conduct competitor research to ensure you are in a similar ballpark to businesses at a similar level and in the same industry as you. If your prices are significantly different from your competitors, you’ll likely attract fewer customers. Furthermore, a strong difference in competitor pricing could signify that your variable costs/overhead costs would benefit from adjustment.
Other pricing models
There are many ways to price your business. A straightforward system can be to charge by the hour. This involves calculating your hourly rates and charging depending on how long it takes a single employee to fulfil the order or service. This price can then be marked up to include materials and profit.
You can also set your prices according to their perceived value, for example, if you are offering something exclusive or in high demand. Alternatively, set your prices low to lure in customers, then once you have secured customer loyalty, slowly increase them.
Customers often respond well to psychological pricing, which involves lowering your price to just below a round number to make it look cheaper than it is, e.g. £19.99 instead of £20.00. Offering discounts or freebies with bulk orders increases sales while making the customer feel they’ve gotten a good deal.
It is important not to undersell your skills and talent. Many people are willing to pay more when buying from small businesses, as they feel more ethical, unique, and trustworthy than large companies.
For more advice on setting up your business and finance tips, read more via our Knowledge Hub.
