The basics of setting the right price

Pricing is one of the most important aspects of any marketing strategy and setting the right price for your products or services can make running your business both easier and more financially rewarding.

Many business owners struggle with setting the right price and either feel they are missing out as customers raise an objection about prices being too high, or on the other hand, have the unsatisfied feeling that they are pitching themselves too low and getting sales with too little margin.

So what can be done to set an accurate price for your products or services? In the first instance, the obvious choice is to balance two sides of the equation; that being the cost of manufacture, or to provide a service and bring it to market; against what the customer perceives is good value.

Both of these areas will require some research and the first half, estimating the costs of the product or service is often much easier than the other, which is to guage the price the intended market is willing to pay and why. 

Estimating costs needs to take account of the real cost of bringing the product or service to market, so should include both raw materials, labour and logistics, or if a service, the value of that time and other costs such as personnel, travel expenses and equipment purchases. Marketing costs should also be factored in so that the figure you end up with, once divided down, gives you an accurate (as near as) unit cost to you.

Once you have a handle on your costs, you can now fairly accurately work out your break-even figure. This figure represents the balancing point between your outlay and what you need to cover this. This figure would be the price you would charge if your business was to make zero profit.

As profit is the objective of doing business, then the gap that must be managed is the one between your break-even price, and the price customers are happy to pay. If you are going to charge more than an equivalent product or service can be purchased for in the market, then there must be perceived features and benefits in the customer to leverage a decision in your favour.

Deciding where to pitch your price in the market can be done firstly by undertaking benchmarking actions. This means taking a look at competitors’ offerings and seeing where they are positioned on price. Also, seeing if their offer is equivalent or not, in terms of features and benefits to the customer.

Benchmarking must be done with care, as firstly it cannot be assumed that a competitor’s pricing strategy is right, or secondly, that they are not following a certain strategy that would influence price, either temporarily or on a more permanent basis.

If you have a new product in the market, or an invention that cannot be benchmarked with other equivalent products, then a value must be estimated of the benefit over what is there currently, to fulfil the need.

Another aspect of pricing is branding. An established and well known brand will often be able to charge a premium over an equivalent product or service that people are willing to pay, based on the positive association with the brand.

If launching a product or service as an unknown brand, then it can still be launched as a high-end offering, but it will have much more of a need for tangible unique features, quality or benefits to command its premium price tag.

Aside from benchmarking, sometimes a business owner will have an inherent feel for where a price should be. This can be a gut-feel thing, but no less accurate as it is probably based on years of experience and market knowledge.

Getting the opinions of trusted advisers, colleagues and staff, or even surveying the public can provide useful insights that can directly affect price. It can be quite shocking that sometimes people will openly state in their opinion your product or service is too cheap for the quality you provide.

So then the question is more about having the courage to stand by your price, to ensure it is profitable and worth your time and effort to provide what you do, or sometimes bravely admitting that actually, after your cost calculations and pricing needs, your offering is just not worth pursuing any further.

Pricing strategy can be a complex area of business, but the basics remain the same as the fundamental need is to sell enough at a decent profit, enabling your business to survive and thrive. So the question is... what are you going to charge?