Pricing your product

Pricing your product can be tricky. You know it has value, and how much time, money and passion you've put into bringing your vision to life.

But what will consumers think is a fair price? And how can you maintain profitability while challenging the more established companies in your market?

Pricing is especially important to get right in a city like London, where overheads are high and competition is fierce.

In this article, learn what you should factor into your pricing strategy, including fixed and variable costs, understanding your rivals and customers, and different pricing models.

Calculate your costs

Your business costs form the foundation of your pricing strategy and there are two types to factor in:

• Variable: variable costs are any business expenses that fluctuate in line with your level of business activity. The more of your product or service you produce and sell, the more materials, labour hours or commission-based wages you need to pay for.

• Fixed: in contrast, fixed costs remain the same regardless of your level of business activity. These include overheads like lease or rent, insurance, utilities and some salaries.

Using these costs, you can work out your break-even point (BEP) – where your costs and revenue are equal and you're making neither profit nor loss – and then set a price that allows you to make a reasonable profit.

The break-even formula divides your fixed costs by price per unit minus variable costs.

BEP = Fixed costs / (Selling price per unit – Variable costs)

Here's an example:

If your fixed costs are £600 and you sell each unit for £15.

And your variable costs per unit are £9.

To work out your break-even point, you need to calculate £600 ÷ (£15 − £9) = £600 ÷ £6

So your BEP = 100 units

That means you need to sell 100 units to break even.

Know your market

The next piece of the puzzle is to research your market and competitors. What are other, similar businesses in London charging for their product or service?

This will give you a good idea of consumer expectations and give you a benchmark for your own pricing strategy.

Pricing strategies

Now that you have your break-even point and an understanding of the local market, you can choose a pricing strategy that makes sense for your business.

Cost-plus or markup

Cost-plus pricing adds a fixed percentage (or markup) on top of your unit cost to determine a selling price that both covers your costs and gives you a reasonable profit margin.

Competitor-based pricing

Based on your research, competitor or competition-based pricing is simply using your rivals' prices to determine a fair price for your own product.

This could be the same as, slightly lower than, or slightly higher than, depending on how your product compares.

Value-based pricing

Value-based pricing is a model that takes into account the perceived value of your product, rather than simply how much it costs to produce.

In other words, what is your customer willing to pay for your product based on:

• Its quality.

• Perception of your brand.

• How it compares to similar products.

• The extent to which it meets their needs and expectations.

Unique, luxury and truly innovative products are best placed to take advantage of value-based pricing, rather than everyday commodities.

That's because they deliver exceptional experiences or enhance a customer's self-image, status or quality of life.

A lot of this comes down to how you present your brand to your target market and how you communicate its benefits and its advantages over rival products.

Test and review your pricing strategy

You don't have to be tied to either your pricing strategy or the prices you set at the outset. You should aim to increase, or at least review, your prices at a minimum every year.

Equally, if you set your prices too high and it's impacting sales, don't be afraid to reduce them, so long as you still leave yourself a reasonable profit margin.

There are many reasons to change your prices, including:

• Customer demand: you may find that the sheer success of your product, in terms of customer demand, gives you the confidence to increase your prices.

  Provided you've earned their loyalty and they value what you do, your customers should be happy with a reasonable price increase.

• Economic shocks: if the cost of your raw materials suddenly goes up, you will, in turn, have to pass this increased cost in production on to your customers in the form of higher prices.

• Inflation: the cost of everyday commodities rises with inflation. If your product is such a commodity, it's normal to raise or reduce prices in line with general market trends.

• Sales: discounting products to stimulate sales is a pricing strategy we're all familiar with. You have to use sales carefully, though.

  • First, because you don't want to give your customers the expectation that they can always wait for a price reduction.

  • And second, because even if it results in offloading unsold stock, if you're selling too many products at a discount, you're putting a serious dent in your margins.

Aside from your sales figures, a simple way to determine if you've priced your product fairly is to ask your customers directly. On-site pop-ups or feedback requests via email after a purchase are an effective way to do this.

If you're going to increase your prices, communicating the change to your customers is key. This is where an effective marketing strategy comes in.

Consumers expect prices to rise, but explaining why you're doing so at any given moment will maintain trust and could prevent them from jumping ship to a competitor.

If market forces have dictated your increase, there's no doubt your competitors will also have had to raise their prices.

A simple email to existing customers can be the most effective method. Or, if you're trying to attract new customers with a price promotion, a social media campaign will give you the best reach.

Conclusion

Pricing your product in a thriving and competitive market like London is an art. Things never remain the same and neither should your prices.

If you want to build a loyal customer base and achieve sustainable growth, take a strategic approach: listen to what your customers have to say and be adaptable to market changes.

How Grow London Local can help

Grow London Local offers free resources on all aspects of starting, running and growing a business in the capital.

Whether you want to become a household name by breaking into major retailers, need advice on building your brand or need to know how to build a professional-looking website, we have a blog to help.

On top of that, you can use Grow London Local to discover events where you can meet like-minded entrepreneurs, or you can book a free consultation with one of our Business Support Managers, who can provide tailored advice.

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