Price your product or service

1.1 Unless your product is unique - check out the competition.

Find out how much your competitors charge.

If you set your price too high above theirs you risk gifting them an important selling proposition. This could result in you losing custom.

Set your price too far below theirs and you will be throwing away profit, while consumers might wrongly consider your product to be inferior.

Find out whether your competitors offer price-sweeteners (eg 'buy now, pay later' deals). If so, consider whether you can compete.

Try to understand their selling strategy. For example, see if they offer seasonal discounts or whether their prices are deliberately kept low to attract sales on other products.

Never simply match a competitor's price without calculating your own costs first.

1.2 Don't try to match all of your competitors.

Sales strategy, economies of scale or access to cheaper supplies might be responsible for a competitor's lower price.

If their product is similar to yours and you cannot match their price - consider your product's commercial viability.

You could trim your costs to undercut them. However, cutting your margin to win custom can be dangerous.

You will be able to justify your higher price tag if your product offers better quality or additional benefits.

1.3 Understand your potential consumers.

Market research provides valuable feedback on potential consumers, your product and your competitors.

If you don't already know, identify your potential customers and find out about their tastes and habits.

Target a representative market sample. Find out where, when, why, how and in what quantity they buy.

Gauge their attitudes to existing prices. Find out which products consumers believe offer the best value - and why.

If consumers believe they are already paying too much, consider whether you can offer a cheaper option.

Alternatively, find out whether they would pay more if your product offered superior quality or additional features.

Have a sample of your product to show, or a well-considered explanation of your service and its benefits.

Keep a comprehensive record of feedback and remain objective when analysing it. Don't take negative comments personally - derive value from them.

1.4 Create a benchmark price.

Combine the information you have gathered about competitors' products with information about your potential customers. Try to establish a benchmark figure for how much you need to charge for your new product or service.

You will still be able to set your price higher or lower. But, having a rough idea will prove beneficial when it comes to assessing the price of your product or service (see 3.5).

2.1 Work out your costs by volume rather than unit.

It will be quicker than having to divide all costs by the total number of units you intend to produce.

2.2 Calculate research and development costs.

These can be considerable. As a rule, aim to recoup them as quickly as possible. However, to keep your price more attractive, you might choose to take a longer-term approach.

2.3 Work out your variable costs.

These include raw materials, electricity, packaging and distribution charges. These are linked to volume - the more you manufacture, the higher the cost.

Pay special attention when calculating variable costs. Assess whether these could be reduced, perhaps by getting a better deal from your suppliers.

Try to account for all likely price rises during your product's initial cycle.

2.4 Calculate your fixed costs.

These remain constant regardless of volume. Fixed costs include business rent, rates, insurance, National Insurance contributions (NICs), administration fees and salaries (although wages will increase if you have to pay overtime for rush orders).

Work out how much your new product or service should contribute towards fixed costs. The more business time and effort it requires, the higher this figure needs to be.

Try to account for any likely increases during your product's initial cycle (eg if you know your rent will increase).

2.5 Calculate your breakeven figure.

Add R&D expenditure to your variable and fixed costs. This will give you the product volume breakeven figure (the amount of revenue your product needs to generate to avoid being a loss-maker).

When calculating your breakeven figure it is essential that you have factored in all of your costs. Mistakes can be disastrous, so go back and check you have accounted for everything.

3.1 Decide how much mark-up to add.

Cost-plus pricing requires adding mark-up to your breakeven figure to create the desired profit margin.

Mark-up is expressed as a percentage of a product's total cost to your business.

A mark-up percentage could be the result of past experience, industry or product norms.

3.2 Add a high mark-up when possible - but keep your price attractive.

You could have a higher mark-up when:

• your product or service is most in demand
• your product is unique or rare
• variable and/or fixed costs are low

3.3 Know when to settle for a lower margin.

Always keep your price as high above your breakeven figure as possible. But, you will only be able to add a modest mark-up to certain lines at certain times. This could be when:

• you have to work hard to introduce your product to the market
• your product or service faces a lot of competition
• your costs are high
• demand is low (eg your product is out of season or fashion)
• you are selling to trade customers or offering bulk discounts

3.4 Create a unit price.

Once you have added mark-up to your total costs, divide this by your product volume to give a unit price.

For example, if total costs plus mark-up equals £51,000 and volume is 1,000, your unit price to the customer is £51.

3.5 Assess your unit price.

You can increase or decrease it, but think very carefully before doing either.

How does the unit price compare to your market research findings (see 1.3)?

If you think your unit price is too low, consider whether you can increase your margin. Also check you have factored in all costs.

If your unit price is too high, explore ways of reducing your costs. If you cannot, your only option is to trim your margin. However, this should never be done without first considering all of the dangers.

Your final price can also be influenced by many considerations (see 5).

If you are in doubt - aim high. If sales are slow because the price you set is excessive, customers are likely to look favourably on the reduction.Attempting to justify a considerable price hike when a product has not improved is always difficult. A low price can put customers off by creating low-quality perceptions.

3.6 Recognise the limitations of cost-plus pricing.

Although cost-plus pricing is very common (especially for products), be aware of its limitations:

• It ignores brand image and market position. When you want to create a high-quality brand perception the price needs to reflect this.
• You can lose profit by ignoring market demand or how much value customers attach to your product or service.
• Mistakes in calculating your costs will reduce profits.
• It assumes you will achieve a breakeven sales target.

4.1 Know what value-based pricing is.

It relies upon how much customers are prepared to pay for a product or service, guided by how much value they attach to it.

This method is most commonly used for service pricing, however, it can be used for products.

A value-based price is often far higher than total costs. For example, the cost to a glazier to fix a broken window might be £2 for travel, £15 for materials and one hour's labour at £30. However, the value-based price to the customer might be £90.

Similarly, consumers might be willing to pay £120 for a pair of shoes which costs the retailer only £40 to buy from the maker.

4.2 Know your market.

Your market research (see 1.3) could be extremely useful when deciding a value-based price, especially if your product or service is new or unique. You need to know what price consumers are willing to pay.

Find out how much your competitors charge if their product or service is similar to yours.

4.3 Structure your prices for services.

The price you charge for your service needs to be different if it is delivered at different times. For example, locksmiths charge premium rates for emergency weekend call-outs in the early hours - much less for call-outs during more sociable hours on weekdays.

Some businesses need to work out separate rates for the hour, half-day and day, as well as a minimum call-out fee.

5.1 Supply and demand.

Whether you opt for a cost-plus or value-based method, supply and demand are both major factors to consider.

If you are the only supplier and demand is high you will be able to set a higher price than if you are one of many that offer an item less in demand.

Demand could vary at different times. You need to account for this, perhaps by lowering your price to attract custom when demand is low. Set your highest price when demand is highest.

5.2 Your cashflow.

Sometimes it might be necessary to settle for a low margin to bring in money as quickly as possible.

5.3 Positioning your product or service.

How consumers perceive your product or service is very important.

Even if your costs are low, a high price tag creates the perception of premium value.

Setting your price too low can create a false perception of low quality.

5.4 Value Added Tax.

VAT is a transaction tax on sales of goods and services. If, in a year, your business sells total products or services worth more than the threshold set by Government (in the 2011/12 tax year this is £73,000), charging and paying VAT is compulsory.

If this applies to your business, consider how adding VAT will affect your prices.

5.5 Other products or services you sell.

You might choose to keep your margins down on some to attract custom on others with higher margins.

Another product or service might not have sold well, so you might make up for this by increasing the margin on a new product. Similarly, if other lines have sold well, you might consider cutting your mark-up on a new product to make its price tag more attractive.

5.6 Vanishing opportunities.

Consider the shelf life of your product. Demand might fall off or it might become obsolete when superior alternatives are developed. Maximise margin while there is demand.

Those who trade in perishable products usually lower prices as sell-by dates approach.

5.7 Your competitors.

They might suddenly reduce their price to wrestle market share from you. If their product or service quality is comparable to yours, consider whether you can compete by cutting your margin.

Find out exactly how low their price is and how long this will last. You might be able to weather a short-term threat. If it is long-term, you should consider ways to improve your product's benefits to consumers.

5.8 Selling overseas.

Find out about regulations and local market conditions.

You might have to increase or decrease your UK price.

Think about delivery charges and how these affect price.

Consider how your prices will be perceived when converted into local currencies (eg $41.13 will look odd to US customers).

5.9 Online sales

You might be able to offer discounts on these if they require less time and effort to process.

6.1 Odd value.

Popular in retail, this is the practice of selling something for £59.99 instead of £60 - a subtle way of making prices seem more attractive.

6.2 Loss leaders.

This involves selling a product at a loss to win new customers. Always think carefully before doing this. It works best when you have other high-margin products or services to which you want to attract custom.

6.3 Skimming.

The tactic of selling a unique or 'must-have' product at a high price until all customers who want it have bought it.

6.4 Penetration.

Setting a low price to maximise market share and build brand loyalty before competitors can catch up.

6.5 Discounting.

Doing this too often might lead customers to question your usual rates. But discounting can be effective when trying to:

Always aim to make a decent profit, even on discounted sales.

Remember - customers motivated purely by price tend to be disloyal.

Discounted goods can have a negative effect on other items you sell.Customers might opt for the cheaper alternative.

• introduce a product to the market and win new customers
• capture large orders or sell products in 'bundles'
• persuade customers to buy when demand is low
• encourage loyalty by giving discounts to valued customers
• clear old stock and free up working capital
• encourage early/cash payments

7.1 Make sure your prices remain optimal.

Your fixed and variable costs can change quickly and regularly. Try to account for significant increases by increasing your prices. However, if this is likely to threaten sales, you might have to settle for a reduced margin.

When your costs fall - don't automatically reduce your prices. You might be able to enjoy an increased profit margin.

Remember too, your costs can soon go up again.

7.2 Check your business performance.

Continually assess whether your products or services are hitting their sales targets.

Products with high or growing market share present opportunities for increasing prices.

Shrinking or low market share might lead you to reduce a price or think about developing a new line altogether.

Poor sales performance might not be due to the product or service. Consider how well your sales strategy or tactics are working. If your marketing efforts are found to be lacking, consider rebranding or relaunching your product.

8.1 Consider the likely impact on profits.

Sudden or excessive increases can have a disastrous effect on sales. Rely on your knowledge of the market and your product. If necessary, conduct more market research to gauge reaction to your proposed price increase.

8.2 Communicate with your customers.

Explain why the price increase is necessary. Trying to hide an increase from a valued customer can damage the relationship and force them to look elsewhere.

They are likely to appreciate you giving them adequate time to plan for the change to your price.

Soften the blow by re-emphasising the benefits of your product.

Work with them to explore all of the options, if they cannot meet the increased price.

8.3 Hiding price increases.

Sometimes you might think it wise to be a bit shrewder when increasing your prices. You can do this by:

• introducing new, higher-priced goods gradually while making old products obsolete
• lowering the specification/quality of a product while keeping the price the same
• improving the specification/quality of a product while increasing the price disproportionately