What you need in your tool kit to determine your prices.
Running your own business is one hell of a ride. Some may say it's a bit like having a baby, no amount of well-meaning advice can really prepare you for what's in store. You just have to jump in and do it.
One major pit fall for new (or even established) punters is being underpriced. Now, when we say that - we don't necessarily mean they are under market value (ie; cheaper than competitors). We mean they are never going to be able to make money or pay themselves a wage and the number one issue is that they don't understand their operating expenses and start-up costs. When owners don't truly understand the cost of running and marketing their business, it makes it very tricky to attribute operating expenses as a % of their overall revenue.
We'd love to tell you that there is a 'silver bullet' for determining the perfect price for your offering but unfortunately, it’s all too vast and there are way too many variables from business to business.
Deciding how much to charge for your product/service requires more consideration than estimating your costs and adding mark-up (although this a strategy, it’s called cost-plus pricing). On top of your typical operating and marketing costs, you need to consider your own wage (tax and super contributions) and also budgeting for things like promotions & discounts. If you have a product-based business you will also need to consider how much discounting stock and free shipping is going to eat into your margins.
To get started, there are a few things you'll need at hand.
Labour costs (how many minutes/hours to deliver or create your product/service).
Your annual operating expenses including your marketing costs (to calculate your operating expenses %).
Shipping & packaging costs.
Cost of the product (wholesale).
Fees such as Afterpay, Zip Pay, PayPal, Shopfy, Apple pay etc.
Let's take a look at the theory, here are 5 popular pricing strategies:-
Value-based pricing: Charging based on what consumers think your product or service is worth vs. what the actual costs are. The main way to determine this is by testing the market in terms of what your ideal client is prepared to pay. The 'market price' for your product or service will also play a part in this (aka, what your competitors are charging). Many service-based businesses and entrepreneurs run this model. As long as the value to the customer is higher than your costs, we like it!
Cost-plus pricing: We mentioned this strategy earlier. This is simply calculating all your costs and adding a markup. This strategy can be effective if you are very thorough in accounting for every single cost to your business and adding a little more for unexpected expenses that undoubtedly pop up.
Competitive pricing: This is the method of setting the price based on what your competitors are charging. This strategy can be great if you are making a considerable margin and we are certainly in favour of any strategy that doesn't involve competing on price as you can compete with the other factors that make your product or service unique. But what happens when a considerably cheaper competitor enters the market? Or if the existing competition decides to drop their prices. How would that impact your sales and net profit?
Penetration pricing: Is a strategy that many service-based business owners use, potentially without even realising it (we certainly did). Entrants set their price low to enter a market and raise it over time.
Price skimming: Is where you set a high price and lower it over time. This can be effective in a new market or with new technology and luxury goods. Think Apple inc!
When determining which pricing strategy is right for you we'd love you to consider the following;
Being fair and reasonable is a great start (what would you pay?).
If you are going for a price premium, does the quality of the product or service reflect the premium price?
Be very clear about what makes your offering unique and sets you apart from your competitors.
We specialise in pricing for profit, if you'd like to take a deep dive on your pricing strategy book a free consult with us here.