Ask The Expert: What are the guidelines to setting the best price for a service/product?
This month we asked Ruth Wood, a Family Economics Mentor and Coach, to give us the guidelines to help us determine the best price for our product or service. Ruth writes: if you are not sure about how to price you should consider the following:
a. Set your price too low and you will:
risk making a loss
give the impression that your product or service has little value and is not worth buying
risk starting a price war with your competition, a price war that larger suppliers are more likely to win.
b. However, if you price your product or service too high you may simply not sell anything.
You need to get the pricing "just right" - but how? Take into consideration these four points:
1. What is happening in the marketplace:
Are existing product offerings identical or similar? If so, the market price will be more or less what you can charge. If your product or service is special enough or you are the only local supplier a higher price might be justified.
Once you have seen what your competitors are charging you need to work out what your costs will be to see how much profit you can make. If this gives you too low a profit margin, check all your costs to see what you can cut.
2. What your product or service will cost you to get to the marketplace:
Make sure that you include all costs: development costs, materials, equipment, rent, taxes, labor (including your time), overhead (such as bookkeeping, insurances, legal fees) packaging, and marketing. If you need to borrow money either to set up or to tide you over until clients pay, include the interest on loans you will pay. If you are making a physical product you will have to take into account that some of your products may be returned.
Getting a full picture of costs is critical. Otherwise you may well find yourself losing money. In this context it’s very important to keep all business finances completely separate from family/private finance to ensure that all costs are taken into account. This is especially important if you are running your business from your home.
3. Who your intended customers are:
If you want to establish a wide customer base consider offering different versions of your product or service: from a more basic item at a lower price up to a luxury version with a higher price. The luxury item will attract certain customers from the beginning but you will also give customers who want to spend less the possibility to get to know your product or service and then spend more if they wish to.
4. What stage your business is at:
To establish demand for a completely new product, or to increase sales and market share in an
existing market consider going for a low price for a while.
The hope is that you will acquire loyalty for your brand and customers will still buy your product or service when the price is raised to a more realistic long-term level.
This price examination process is not a one-time exercise. You must continue to monitor your costs and market conditions throughout the life of your product or service in order to keep everything under control and achieve your long-term business goals.
About the author Ruth Wood, a Family Economics coach.
Drawing on her many years as an accredited accountant, first in England and then in Israel, and her training and experience in family economics, Ruth opened Ruth Wood Family Economics in 2013. She helps families learn how to take control of their economic situation: live within their means, clear debts, set and achieve economic goals and start to accumulate savings for a brighter economic future. You can read more about her services here http://ruthwood.co.il/