How do you price your product or service?

There are many factors which will have an influence on pricing and the better your understanding of these factors, the more likely you are to be able to set the optimum prices...

No business can survive without generating enough profit, so setting the right price for your product or service is essential to the success of your enterprise. There are a number of established techniques for setting prices and the one you use will depend upon; your market, your customers, your competitors and so on.

Mark-up and margin pricing

This is where your profit is either determined as a percentage of the cost price or of the sell price. Where the profit percentage is based on the cost price, it is referred to as mark-up. Where it is based on the sell price it is known as margin.

Pricing by competition

This type of pricing is common where the products for sale are available from a large number of suppliers, the margins are narrow and the customers are especially price-sensitive. Going rate pricing effectively means that you match the prices that are being offered by your competitors.

Breakeven pricing

Breakeven pricing is where you calculate the breakeven point of your business - the point at which your sales income and your fixed and variable costs are equal - and set your prices by adding your profit margin onto your unit price.

Perception pricing

This type of pricing technique may require a significant amount of market research. It is often suitable where a brand new type of product is being introduced into the marketplace and the price is determined by what your target market perceives to be its value, ie how much they would pay for it.

Rule of thumb pricing

The rule of thumb technique is simple and lends itself better to certain types of businesses such as construction or repair services. An example of a rule of thumb formula would be where a building contractor would charge twice the cost of the raw materials plus labour or twice the cost of the labour plus the raw material costs, whichever is the greater.

Contract pricing

Vying with your competitors for a contract can be a risky business if you are not sure of your market. Your pricing will depend on what your profit objectives are and a general understanding of what your competitors are likely to be offering. Bear in mind that if you tender for a lot of business and your success rate is very high, you might be offering your service or product too cheaply.

Many businesses use their own tailored pricing techniques and these vary greatly. They all have a number of factors in common, however. They take into consideration factors such as; competition, products, the state of the market, the value of your stock, demand and supply, and are calculated to cover costs and provide an adequate profit in the long term.