What Price Should I Charge?
Do I Set A Cheap Price & Undercut My Competitors?
Or Do I Stick My Neck Out & Charge A High Price?
These are common questions that scores of business people have asked me over the years.
And, it can be difficult to answer.
Many factors will affect the price a business should charge for their products or services, such as:
who your target customers are & what their buying power is
what the competition might charge for the same or similar products
your production or buying cost of the product
your business cost base
whether you have to charge VAT on the product
to list some of the main factors.
Don't Charge Too Little
Many businesses fall into the trap of charging too little for their products, especially when they start a new business or they launch a new product. When too low a price is initially charged, it can be very difficult to raise the selling price, if subsequently it is realised the price has been set too low.
Survey after survey show that many customers do not want cheaply priced products necessarily but want value for money, rather. Yet, other surveys show that many business owners think that price is the most important factor that determines sales.
There Are 4 Methods, You Could Consider
When considering the selling price, there are 4 methods that you should use, either separately or collectively.
Customer based pricing policy: Here you should research your target customer groups and investigate what prices they are prepared to pay or can afford to pay for the same or similar products. One idea might be to ask target customers for their opinions.
Competitor based pricing policy: Here you should research the pricing of your main competitors for the same or similar products. By being slightly cheaper than your top competitors, you could create a competitive advantage for yourself, that may mean customers choosing your products in favour of those from your competitors.
Cost based pricing policy: Here you should evaluate all your production or buying costs for a product, including a percentage of your total business costs, not forgetting employment costs, costs of loans, rent, rates, energy etc. to establish your product unit cost. You should then add what profit margin you think you deserve.
Value for money based pricing policy: Here you could set your price based on the benefits of your products to your target customers. The bigger the benefits, the bigger the value to your customer and possibly the higher the price you could charge.
This process is easier if you sell the same or similar products as your competitors or if there is an established market with customers already buying. Obviously, if you are more expensive, you could find it difficult to create sales unless your quality or customer service, etc., are more superior, in which case you should consider method 4 and the Value for money pricing policy.
If, however, you are launching a new product that is different to existing products or you are selling unique ‘one-off’s’ such as gift items, paintings etc., this pricing could be more difficult. Here you should definitely consider Method 3, the cost based pricing policy, as it is important that you recoup your costs and you make a good profit for yourself.