Pricing products and services

How to price your products and services

Setting your pricing can be a tricky balancing act, but it’s important for the long-term success of your business. This guide outlines the different pricing strategies you could use to get the balance right.

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In this article

Why pricing is important

As a business owner, pricing is an important responsibility. We outline how you could:

  • Set the right price for your products and services – not too high to deter customers, but not too low that it puts your profitability at risk
  • Defend and justify your price to customers (to avoid the temptation to give away your margin by offering discounts to get the sale)
  • Know when – and how – to raise your prices.

Setting your price – the groundwork

Many businesses don’t have a proper pricing strategy – so it’s not surprising they often struggle to set their prices. Even worse, without a pricing strategy your prices may not produce enough revenue to meet the costs of your business.

Before you delve into a pricing strategy, it’s essential to do your due diligence when setting your pricing. That means being clear about how much profit you want to make, your costs, what your competition is charging, and what your customers would be willing to pay for your products and services. 

Working out how much you need to make to break even is a useful starting point. Our break-even calculation can help you establish the minimum income you need to stay in business.

Choosing a sensible pricing strategy

Once you have a good idea of what you need to break even, what your competitors are doing, and how much your customers would be willing to pay for your products and services, you can choose a pricing strategy based on these factors. 

There are a few pricing strategies you could choose from depending on your business objectives and what type of business you are. Below are some of the different options.

Cost-plus pricing

This is where you calculate the cost to produce your product or service, then add a mark-up. Many business owners favour this strategy because it’s simple – all you’re really asking is how big you want your margin to be.

But there are other ways to price. For example, you could price competitively by looking at what your competition charges and setting your price based on that. You could choose to match your competitor, or perhaps it makes more sense to undercut them – although beware, as this could backfire (see below). 

Value-based pricing

With value-based pricing, you set your price based on what your customer thinks it’s worth. This strategy requires you to really know and understand your customer so you can price accordingly. And if your price doesn’t work – in other words, customers aren’t buying – you don’t necessarily have to lower your price. You could look at other ways you could deliver value to meet your customers’ expectations.

Price skimming

This pricing strategy is often used by businesses when they’re introducing an innovative new product to market. With price skimming, you set a high price to capture ‘early adopters’, then as the product becomes more mainstream and the excitement drops off, you lower your price to capture a broader market.

Penetration pricing

The opposite of price skimming is penetration pricing – starting your product or service at a lower price and raising it later when demand rises. This can be an effective strategy if your goal is to build a customer base, or if there are many similar products in the marketplace – a lower price can convince customers to try your brand over the others.

Consider your business objectives

When setting your prices, keep in mind your core business objective. For example:

  • Maximising profit
  • Increase or hold market share
  • Match or beat the competition’s prices

If you want to maximise your profits by charging as much as you can, the risk is your customers may go elsewhere – which may work out if you still get enough customers to make a profit (and you’re doing less work).

But if your objective is to increase or hold your market share, this might mean you have to sacrifice some of your profits and possibly charge less to certain customers, so they continue to buy from you.

To match or beat the competition’s prices, pricing low can work (for example, if you’re aiming to get new customers). But be careful about competing solely on price – especially if your competitors are larger businesses with deep pockets. You also don’t want customers thinking that because you’re cheaper, your products or services are lower quality than the competition.

Take your time, do some research (don’t guess), review your strategy regularly, and be prepared to make changes if necessary. 

You’ll know your pricing strategy is working when your prices are:

  • High enough to cover costs
  • Gives you a reasonable return
  • Attractive to customers.

Defending your price

If you’ve done your homework, you can be confident in your pricing strategy – but you need to instil the same confidence in your customers. Here are some tips on how you could make your customers happy to pay the price you’re charging.

Point out your added value

There’s more to a product than price alone. Things such as quality, productivity, guarantees, fast delivery or free installation are all of value to customers. Identify the areas where your product or services adds value, communicate these to your customers, and make sure your staff do, too.

Ease your customers’ pain points

Customers are often willing to pay more for products or services that solve their problems or frustrations. For example, people are often frustrated by tradesmen not turning up on time. Many customers would be happy to pay a higher price if you can guarantee that you’ll arrive on time – or it’s free.

Differentiate yourself from online competitors

People often research prices online and expect businesses to match online competitors. You could counter this by focusing on the worries and issues people have with internet purchases – for example, delivery costs, returns, warranties, and the ability to try before you buy. Show them how buying from you could avoid these issues.

Stand your ground

If your existing or prospective customers query your price, don’t automatically offer a discount. Not budging on price might reassure your customers that you’re the right business to deal with. Remember that customers who are focused solely on price may not be very loyal or profitable. Consider how important the customer is to you, and the likelihood of ongoing business from them, before offering a discount.

Stay cool

If a customer challenges you on your price, don’t take it personally. Instead, explain in a professional and friendly way why your product or service is worth the price, it will go a long way towards winning people over.

Increasing your prices

You should always be seeking to increase your prices over time, if only to keep up with inflation. Increasing prices widens your margins and frees up cash you might need for business growth – but many businesses are reluctant to raise their prices out of fear of alienating their customers. Here are some tips to help.

Check your costs

If you’re worried about losing customers from raising your prices, you may be able to improve margins by reducing costs instead. For example, consider changing providers for things like power or telecommunications, using technology like Zoom to reduce travel expenses, or removing slow-moving products from your inventory.

Shine a light on your unique value proposition

It’s important to convince your customers that your products or services are worth the increase. Use your unique value proposition – whether it’s great customer service, free delivery, or a superior product – to help show customers why your product is worth the extra money.

Mind the competition

Consider your market position and what your competitors are charging. Think beyond competitive pricing and focus on your unique selling points, and how your pricing might complement these. Remember too that your competitors aren’t just those businesses that are physically close to yours – the internet has shrunk the world considerably, so your neighbours are now global.

Provide the best customer experience you can

Make sure your staff are on the ball and provide them with everything they need to do their job properly. Make an effort to know your customers and deal with complaints quickly and efficiently.

Keep your customers in the loop

As well as giving great customer service, it may also sometimes be relevant to communicate to your customers the reasons why you’re increasing your price – especially if the price hike is significant. Open communication shows you’re thinking about your customers and their expectations, and that you’ve got nothing to hide. It means your customers are more likely to understand and accept the change.

Stagger increases

It doesn’t have to be all or nothing. Consider staggering the price increases of your different products over time, instead of raising them all at once.

How to deliver extraordinary customer experiences

Jacqui Hartley-Smith from Positive Solutions Ltd shares a range of tools and tips to help you improve customer experience in your business. 

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