The Pricing Dilemma – Too much or not enough?

Pricing our products and services can be one of the most difficult things to do in business. Undercutting the market will afford you customers, but are those customers the right ones for you?  Bargain hunters are fickle, they have no loyalty to you or your brand, and while they love you and your low prices today, tomorrow they will love someone else, someone with lower prices.
 
Over pricing is also a problem, if your price tag is greater than the perceived value of your product or service people will look elsewhere for a better deal.
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So how can you price competitively, and make a great profit, and stand out from the competition?

Step 1 – Covering your costs
Firstly you need to make sure that your costs are covered.  This is not always as clear cut as you may think.  Using a baker as an example, when pricing a batch of cupcakes you need to consider not just the cost of the ingredients themselves, but also the extra costs incurred when acquiring the ingredients, such as delivery charges or the cost of your fuel and your time to go to the shops to purchase them.
 
You also need to know how much the power costs to make those cupcakes, power for the mixer and power for the oven, power for the dishwasher to clean utensils afterwards, heating and lighting for you while you bake. Other essential overheads that need to be included are business insurance, rent, rates, telephone etc.
 
Then consider the machinery and its maintenance; electric food processor, weighing scales, oven, how much does it cost to maintain these items with cleaning products, spare parts, regular servicing etc
 
And finally packaging – how are they being sent out?  You will need a box for the cakes to go in, but if being sent by courier those costs need to be included too, along with any labelling.
 
Step 2 –Costing your time
How much do you want to be paid?  The hourly rate that you want to be paid, i.e. money in your pocket, isn’t the only consideration.  You need to make a provision for your Tax and National Insurance contributions, payments to a pension fund, extra provision so that you can go on holiday or be ill and still pay yourself.  Your hourly rate will be much higher than the amount you actually pay yourself.
 
When working out the hours for a job you need to consider the time spent planning, time spent making the cupcakes and the time spent cleaning up afterwards.  In some circumstances there could be time for a practise run too or research into new techniques.  Consultations with the customer, initially choosing what they want, trialling the practise run if there was one, and then collecting the finished product.
 
Even consider the time taken for the paperwork side of the job, how long does it take you to invoice your customer? How long to process their payment?  Do you need to take time out of your day to take cash and cheques to the bank?  Time spent doing tasks that are necessary for your business to provide its product or service are all considerations when pricing.
 
Step 3 –Choosing your profit
When all costs directly relating to creating a batch of cupcakes has been factored in, all that remains is the addition of profit.  If your batch of cupcakes does not have a profit margin your business does not have any extra money to grow on.  In addition to this, the price you set for your cupcakes will be rigid, because any reduction in price will actually cost you.  Use your profit margin as a buffer which will allow you to offer discounts when you want.
 
Step 4 – Look at the market
Once you have set your price it is time to have a look at the market, how does your price compare to your competitors?  If it is lower consider raising it, if it is higher look at how you can reduce your costs, maybe you need a different supplier, or perhaps you can reduce the delivery charges you incur by purchasing further in advance.  If you can’t lower your prices any further then consider how you can add value to your offering.
 
Step 5 – Adding Value
To add value to your product or service you need to find something that you can offer your customers that is above and beyond what your competitors offer.  It could be a free gift, an extra product or extra quality in the product itself.  All of these things make your product or service more desirable and people will be willing to pay a little more for it.  This also becomes part of your Unique Selling Point, your USP is what helps you to stand out from the crowd and be more memorable.

If you would like some help pricing your products or would like to review your current prices please contact me at jamie@jamiegoodenough.co.uk