Choosing the price at which to sell your product or service is one of the hardest decisions to make when starting up a business. Too low, and people will think you’re attracting customers purely on price; too high, and you risk not attracting any customers at all.
The first step is to work out what you need to charge to create a viable business. You do this by working out the cost to you of providing that product or service and adding on a profit margin to reflect the effort you are putting in. The second, more difficult step is to work out what you should charge to position your product or service in the right place in the market.
Do you want your product to be perceived as a premium product or as a value product? Customers equate price and quality to an enormous degree – they will automatically assume that a box of chocolates costing £10 is better quality than one costing £5, regardless of what’s inside the box – so you need to make sure you are sending out the right message with the price you choose
1. Don’t undercharge for your product or service
First-time small business owners have a tendency to undercharge for their services because they are very conscious that they are small and new and they don’t want to look cheeky or bold or audacious. But if you charge too little customers will see your products as being of inferior quality. Worse, they will see a business that does not value itself and believe in its products.
The big mistake first-timers make is to think that they can start off by charging a low price to gain a foothold in the market and then gradually increase their prices as they become more established. But it doesn’t work that way. If you enter the market at a certain price level, then that is the level that customers will associate with your product and will expect to pay. Raising prices is notoriously difficult because once customers become used to the idea of paying a certain price for something, they can be very resistant to the idea of change.
If you think that going in with a low price will be a good idea then start by offering customers an introductory deal for a limited period of time only and make it absolutely clear and be strict about when that period of time will end.
However, it is a risky business to overtly link your product or service intrinsically to price at all – if people are only buying your product because it is cheap, then they will instantly disappear when they decide it is no longer cheap, whereas what you should be aiming for is to build a strong brand loyalty amongst customers, so they will make your product or service part of their lives and buy it regardless of price.
2. Find your level
Go out into the High Street or local shopping centre and look at the prices being charged for products similar to your own. Think about whether you would be able to charge more, or less, and either way, why. If you are going to charge a premium price for your product or service, for example, then you need to make sure you are providing a premium product or service – if it isn’t up to expectations, then customers will resent paying a premium price for it.
3. Be wary of discounting
Once you have set your price, don’t be too quick to offer discounts unless there is an excellent reason to. If you feel you need to offer a discount for bulk orders, reduce the total cost to the customer in other ways, for example by offering free delivery rather than lowering the unit price.
4. Ask advice from the people who know
If you are thinking of selling your products via a high street retailer or supermarket, there is a brilliant – and completely free – way of finding out what you should be charging; simply go and ask them what they think. Providing they are running a successful venture themselves, they will know everything about the market they operate in, and so they will know exactly what price they could sell your product at, and how it compares to the competition. They will probably even tell you how many you can expect to sell in a given time period.
Then you can work backwards and work out at what price you will have to sell your products to the retailer – say 50% of the retail price – and therefore whether you will still be able to make a profit on these numbers. And therefore whether it is actually worth your while selling your product in this way. Even the biggest retail stores will be happy to offer their advice for free if you have a product which could be of interest to them.
5. Location Matters
Remember that the price you can get for a product is likely to differ markedly depending on what type of environment you are selling it in. You will be able to get a much higher selling price for your product in an upmarket boutique for example than you would sell it on a market stall.
However, that is only half of the story. You are not only interested in what the final selling price is, but you are also interested in how much of it will find its way back to you. Your scarves might sell for £20 in a boutique for example, and only £12 on a market stall, but if you are only getting half of that £20, in other words, £10 for every scarf sold in the boutique, while you get to keep all of the £12 you sell your scarves for on the market stall, then you will be better off selling them on the market stall.
The practicalities
If you are planning to sell directly to your customers, the simplest way to set the price of your product or service is to ask them how much they would be prepared to pay. You don’t have to pay an expensive consultancy to do this for you – you can assemble your own focus group by inviting a group of friends and acquaintances around for an evening and ask them what they think. Give them a range — say £15, £12.50 and £10 — to pinpoint their responses.
You can also get some useful responses by standing in the street and asking people passing by for a moment of their time. Choose a time and place where people are strolling by in the afternoon sun rather than rushing past in their lunch break.
This process will also enable you to gauge whether it is simply the price which would stop people buying your product, or whether it is something more fundamentally wrong with it.
Things to consider
In general, there are five things which will enable you to charge more than the competition for your products or services:
- Convenience – if your product is right in front of me and so is saving me the time and effort of walking across town in the rain, I will probably buy yours even though it is a bit more expensive. This is how city centre express versions of supermarket chains are able to charge more for the same products than their big out-of-town versions.
- Solving a problem which rival products don’t – or at least doing it in a more elegant
- Being better made, or more durable.
- Having a technological edge.
- Being new or being regarded as being fashionable or cool.
Top tip
If in doubt, price high and adjust later. It is much easier to do it that way than the other way round.
Case study
When Christopher Ward was trying to decide on the price at which he should sell his eponymous watches, he came up with an unusual solution. He placed three advertisements for identical watches in newspapers over one weekend: one offering them for £99, another selling them for £179 and a third pricing them at £849.
The £179 watch sold best, so he set the price at £179 and refunded the four buyers who had been happy to buy the watch at £849. His Christopher Ward watch firm – which has the advertising slogan ‘the cheapest most expensive watches in the world’ – now has a turnover of £4.5 million a year and employs nine people.