Getting the product pricing right is one of the most key challenges a business faces right off the bat. So how do you find that optimal price tag?
If you set your price too high, nobody is going to buy your product. If you set it too low, you risk losing profits – and there’s always the risk people will think your product is lower quality than the more expensive competition. KPMG Small Business Accounting has put together a handy guide to help small businesses find that perfect balance.
As Bivek Sharma, head of KPMG Small Business Accounting, said: “If your market is unlikely to bear your price, think again. And, as a general point, although getting right is best, of course, setting a price that’s too high is better than one that’s too low.”
It’s crucial to do your market research before you set price tags so you can benchmark yourself against competition. If yours is the first to market, research is still key to figure out the ballpark price a consumer would be willing to pay.
Never simply find out what a competitor charges and match it – your costs may be higher, your product may be more premium, they might be offering a better product and therefore be better value, there are a whole host of factors at play.
While conducting your research, you are looking for the optimum price. That is, the price which enables you to cover costs and maximise profits, while keeping prices attractive to customers.
The different pricing strategies
Cost-plus pricing involves working out your break-even price for a unit, and adding a mark-up percentage to the final price.
When using the cost-plus pricing approach, you must include all costs in order to make an overall profit.
Alternatively, there is value-based pricing which means charging customers on what they perceive the value of your products to be.
This approach can yield higher profit margins (think high-end fashion, and the automotive industries) but it requires a very thorough understanding of your target market.
Have you considered introductory offers, loyalty schemes, discounts, limited period offers and bundle deals?
“Customers will welcome the offer of discount later on. Trying to justify a sudden price increase is much more difficult,” said Sharma.
Sign up to our newsletter to get the latest from Business Advice.