How do I know what price to charge my customers?

The price you charge for your products or services depends on the following:

• The cost to make the product
• The cost to deliver the service
• The amount of profit you need to maintain your business
• The price your competitors are charging for similar products or services
• The price customers are willing to pay. For example is there a high demand for your product or service? Is there plenty of choice for customers, thus making pricing more sensitive?
• Will your customers feel they are getting value for money?

Price is very important in running any business – setting the price too low means that your customer may see your product or service as cheap and therefore of poor value or quality. On the other hand setting the price too high could mean you miss out on sales because customers see your prices as too expensive.

The greatest danger when setting a price for the first time is to pitch it too low. Of course you need to compare your prices to your competitors’, but don’t undersell your skills and talent and do make sure that your price covers all your costs. 

Remember: price and cost are different.

The price is how much you sell your product or services for to your customers. The cost is how much it costs the business to make, market and distribute the product or deliver the service.

Costs can be: 

• variable – costs increase or decrease dependent on the quantity being made
• fixed costs –  costs do not change with an increase or decrease in the amount of goods or services produced. 

A useful way to make pricing decisions is to calculate how much it costs to do a particular job or activity and then add on a given percentage as a return for the job or activity. This is sometimes known as mark-up or cost plus pricing.

Here is an example: A garage owner works out all the costs involved to do a small repair job on a car. The costs might include parts, labour, use of premises, equipment, heating, electricity, and staff wages. The business owner then decides that to make a profit when all these costs have been covered he will work on the basis of making a return of 20% on all the work that the garage does on this type of repair job. The costs for the job amount to £100 so the customer is charged £120.

As a small businesses you might want to work out the typical costs for every hour of work you do, e.g. for gardening services, sign writing, photography, etc. Having worked the cost out you will then be able to charge your customers a standard rate per hour. 

Read more on building a budget and calculating profit.

To protect consumers when making purchasing decisions there are government regulations which traders need to comply with. It’s very important that you don’t mislead your customers on price, your  products or services and that you don’t use aggressive selling techniques.