How do I price a product or service?

It is a delicate balance between covering your costs and keeping your customers happy. Finding that perfect balance will ensure customers return to your business again and again.

Before you work out how you will price your products/services, work out the fixed costs and variable costs you will need to cover:

  • Fixed costs could be your premises for example
  • variable costs could be the raw materials or the cost of transportation.

When you have a projected expenditure you can work out the cost you will sell your product/service and how many you need to sell to break- even and make a profit.

Look at how the competition prices its offerings. Unless there are aspects of your business which make a strong differentiation between your business and the competition, it’s advisable to price your offering similarly to your competitors.

Before you price your product, decide what you want your position in the market to be. Pricing makes a big difference to people’s perception of a brand – imagine how much you would be willing to pay for a glass vase in Ikea, then imagine how much you would pay for the same vase in Harrods. What’s the difference? Ensure your branding reflects your pricing, or your customers may be put off.

To help you determine where your business fits in the market, draw a matrix like the one below and try to work out where your business will fit.

When you’ve decided where you’d like your business to sit, make sure you can meet your customers’ expectations. If you have chosen to enter the premium market, this is particularly important: if your product or customer service isn’t up to scratch, your customers will resent paying a high price for it.

There are various strategies you can adopt when you are pricing your product or service. These include:

  • Penetration pricing involves setting prices artificially low to drum up interest in the product. Think about the collectible magazines which start off at 99p but build up to around £6.99 as the series goes on.
  • Price skimming involves charging an unnecessarily high price for a product or service, and is usually used by businesses which are launching a new or innovative product into the market. This is usually only used for a short time, and is designed to filter off customers who can’t afford the product, creating a sense of exclusivity around it.
  • Loss leaders are products which are priced so low their suppliers or manufacturers make a loss. Usually, retailers do this to encourage customers into the shop so they spend money on other products.
  • Psychological pricing – one of the most famous examples of this is the ‘.99’ price tag, which gives the impression consumers into thinking they are spending less than they are.

Hub for Innovation and Enterprise offers free business advice sessions to all students, staff and graduates of the University to help them develop and progress their business ideas. These 1-1 session are completely confidential and free of charge.

Initially you will meet with a member of the Hub Team, who will provide: guidance, basic information, and suggestions; and will then signpost you to the relevant Hub Advisors and Mentors for more advanced business advice.

Business advice sessions can be booked by contacting the Hub for Innovation and Enterprise team on 01227 (82)4641 or emailing [1].

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