The aim of your business is to make a profit., so when you are pricing products or services, you have to take into account all costs that apply, and make sure that you are charging enough.
However, pricing is not solely a financial function. You also have to take into account market expectations and demand. The amount you can charge for your product or service depends on the strength of your USP (Unique Selling Point).
These are questions that you need to ask yourself:
- Do you have a product or service that people can buy cheaply from another source?
- Do you offer any added value?
In the case of services, make sure that you include all the time and materials that are required to deliver the service. These are the direct costs. Be realistic about this! Most contracts take longer than expected. You also need to factor in your fixed costs, i.e. the cost of your premises, heating, lighting etc. These are items which have to be paid for whether or not you are selling products, but you must factor them in as they are an integral part of the business. If you change the prices of your products or services, make sure that you put the figures into your cash flow forecast so that you can see the affect of the change on the business as a whole.
The 6 C's of Pricing:
What are your fixed costs? What are your direct costs? These must be covered in order to reach break even point
What is being offered by your competition? You cannot offer the same product or service at a higher price and expect people to buy from you. However, if you offer real benefit or added advantage then you can increase your prices.
What are customers prepared to pay for your product or service? If you do not know the answer to this, you must carry out market research in order to find out.
Consider the implications to your business of offering extended credit terms, discounts, free delivery etc. All of these aspects may be important marketing angles, but they must also be considered from a financial point of view. How do they affect the net profit?
Are there times when you can afford to charge more? For example, in the case of distress purchases. If your customer needs a very fast turn around, this comes at a price.
Once you have decided on your pricing, be confident with it. Hold your nerve.