How to set your prices

Step One: Costs. Whatever type of product or service you provide, you will have to account for your cost per unit. You must cover all your costs before you work out how much to add so your business can grow. It’s easy to look only at the cost of materials, for example, which vary according to your sales. However, you must also include things like insurance, rent and administration. These are your fixed expenses. You may want to work this out on a monthly, quarterly or annual basis. 

 

Step Two: Competitiveness. Cheapest isn’t always best, but you should know how much your direct competitors charge. For a realistic estimate, it’s worth confirming that they provide comparable products to similar customers. Also use things like surveys and feedback groups to understand what your customers value and how much they will pay. Your market will change over time, so it’s a good idea to keep this under review. 

 

Step three: Your margin. When you have completed these steps, you can work out how much to charge. You must cover all your costs and consider the price of other similar products or services. You will also need to check your business plan to make sure your business can grow. The margin you set is up to you. You may like to know that latest average annual figure in the UK is almost 9%. 

 

Step Four: Monitoring. It’s important to continuously monitor your prices versus your costs. It’s also worth considering that a small increase in price could significantly increase your profitability. If you offer a range of products or services, you might need several different approaches to pricing. 

 

Pricing strategies aren’t only for large corporations. Small businesses can manage pricing in many ways. 

 

Cost-plus. You can simply add your unit cost and required profit margin together. For example, if your unit cost is £2.00 and your margin is 50% then your price is £3.00. However, this assumes you will sell all your products. If you have any stock left at the end of the month, it will affect your profits. 

 

Hourly: Often used by service providers, you can use an hourly rate. You might take this approach to cover your fixed costs and margin. You can then add variable materials, production and delivery costs separately. 

 

Tiered pricing. Not all customers want the same things. You can offer different ranges of products or services to meet their needs, from basic to premium. Did you know there’s a clear tendency for people to choose the option in the middle? 

 

Price bundling. If you regularly sell several things together you could offer packages of related products for a discount. While this affects the profitability of each item, you can sell more overall. The key is to make it clear that customers save money by purchasing the whole bundle. 

 

Tactical pricing. As a new business, you might set a low price to help attract customers. You can then increase your prices over time. You might adjust prices seasonally for your garden products, for example, or offer returning customers a discount to build loyalty.