How do I set prices for my business products or services?
Setting an appropriate price for your products or services is vital to your business’s financial health. There are many factors to consider when setting prices such as knowing your market, competitors, etc. and we’ll cover those later on, but at the end of the day, your business needs to make a profit, or at least break even, so this should be at the core of your pricing strategy.
Before you can set prices for your products or services, you need to know your costs. This allows you to set a break-even figure, which is the amount of money you need to make to cover your costs. To do this, you need to consider all the costs of your business.
Business costs can be grouped into two categories:
Variable costs - these are costs that change depending on how much you sell, like materials packaging and supplies.
Fixed costs - so called because you generally pay the same amount each time period, but these are things like rent, insurance, wages, etc.
From these costs you can then work out your break even cost per unit if you are making items to sell. If you’re a café or a restaurant then your ‘unit’, may be a day, as it’s handy to have an easy to understand target amount for daily takings, but in order to price appropriately you’ll want to cost each item on the menu. These days many POS (point of sale) systems can do this for you, allowing you to enter ingredients and costs for the menu items.
The calculation for this would be Fixed costs + Variable costs = Total costs. You would then divide your total costs by the number of units you have so find your cost per unit. To illustrate this in an example, if you made cupcakes to sell your variable costs would be ingredients, packaging for the cakes, such as ruffled cases, etc and your fixed costs would be kitchen rent, utilities, wages, etc. You produce 1000 cupcakes over this time period too.
Variable costs: £250
Fixed costs: £550
This gives a total cost of £800 and if you’re producing 1000 cupcakes then your cost per unit is £800/1000 = £0.80. So you know now that one cupcake costs you 80p to produce, so that would be absolute minimum you have to charge for it. However, all businesses want to make a profit, so you need to add a markup percentage to this. This is where you need to start thinking about your target market, competitors, future growth, etc. so that you can set a price that your customers will be willing to pay. Markups can be anywhere between 10% and 200% depending on the industry. A higher markup means higher profits. Once you’ve decided on the markup percentage then that will be your selling price. There are two important points to consider at this point:
The above method assumes you’ll sell all your products. If you don’t, then your profit will be lower.
You will still need to add VAT (if applicable) onto the selling price you produce above, so it’s important to think about that when setting your price as VAT can have a significant impact on the final price your customer pays.
This final selling price (including the VAT) will be what the customer will pay, so this is the one that needs to fit with your market and competitor strategy.
This method of costing is one of the most popular and is known as the cost-plus pricing technique. There are a number of different methods you can use though depending on your business and your business strategy.
There are also other things to consider when setting your prices. For example, perception is important. For example, £3.99 may be perceived to be significantly cheaper than £4.02, despite there only being three pence difference in price. On the flipside, there is evidence to suggest that round numbers such as £4 can seem more trustworthy to the consumer.
There are also discounts, extras, bundles and many other things to consider. If you’re a cafe or shop you may want to offer something like a ‘meal deal’ to drive sales of more items, albeit at a slightly lower cost than each individual item.
Once your prices are set, you then need to keep an eye on your costs as if costs go up but you don’t put your prices up then you are reducing your profit margin. It’s important to keep this risk in mind when setting your prices too, perhaps you could have a little buffer that is able to absorb some cost increases without impacting your target profit margin.
If you need any advice in setting prices then we’re here to help and can work through your products with you and discuss what market factors may affect the prices you want to charge.