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How do I know what price to charge my customers?

Getting the price right for your products or services is a key aspect of your business. Getting the price wrong can mean no sales or losing sales to your competitors, it can also mean that despite having lots of sales you are not making any profit. Here we give some practical advice to get you started in setting prices for your business as well as ideas to think about when selling.

What do I need to consider when setting my prices?

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. 

What’s the difference between price and costs to my business?

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. 

 

 

 

How do I make sure I have covered my costs in the prices I charge?

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.

Different pricing tactics

There are different tactics you can use when first deciding how to price your products or services. Scroll through the carousel below to find out more.

  • Psychological pricing

    This is when you set a price which your customers perceive as lower than it is – for example £39.99 instead of £40. Also referred to as ‘odd prices or ‘odd value pricing’, prices ending in 5, 7, 8, or 9 are perceived as representing bargains or savings and are therefore attractive to customers. 

     

  • Competitive pricing

    Competitive pricing is more commonly adopted by businesses selling similar products or services. This tactic can be used after you have looked at the prices charged by your competitors and having taking into account your costs, you can set your price either to match, or below that of the competition. The advantage here is that products and services are priced in line with rival businesses and this avoids a price war. Most businesses do not want to focus on price alone and will push other tactics to win customers – e.g being a local business, offering exceptional customer service etc. This is particularly pertinent to a small business who may notice a narrowing of profit margins from using competitive pricing. 

  • Penetration pricing

    You might decide to charge a low price initially to get your product and services into the market. A low introductory price is used to entice customers to buy your product or service and gain a market share. This tactic could help to build a loyal customer base and strengthen your brand. If using this strategy it is strongly advised to make it clear to customers that the low price is a limited time offer. It is also worth bearing in mind that penetration pricing does attract bargain hunters who may switch brand when the price rises. 

  • Differential pricing

    With this pricing strategy different prices are charged for the same product or service to maximise profit – for example a hairdressing salon may decide to offer a discounted price on a Monday to encourage trade, or lower prices are offered to students or old age pensioners every day. The benefit of differential pricing is that it allows your company to expand by attracting new customers who may not have previously brought a product or used a service from you, thus increasing sales. However, if a discount is permanent (i.e discount offered to students) this could mean lower profits over time. Also, you may lose custom once a temporary discounted price goes up. 

Beware of misleading your customers

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.

Go to Next Steps below to read more on the guidance for traders on good practice in giving information about prices.

 

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