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  • Camron Finlay

Pricing Is Never “Just” Costing

How do you calculate the price of your goods or services? Do you charge what everyone else does? While you don’t want to charge less than what you are worth, you also don’t want to price yourself out of the market, so now it’s about more than just ‘a price’.

Costs have gone up. Labour costs could have big increases next year. Pricing is a mix of costing and research, so you need to consider these five factors when setting prices, whether just starting up or reviewing current prices.

1. Costs

You need to know the costs of running your business, while the costs you have may be similar to other firms in name, they are not necessarily the same in amount.

Look first at the direct costs, which are the costs of producing and delivering your goods or services (materials, packaging, direct labour). What are the fixed costs (or overheads), these are the expenses that will come in every month (rent, insurance, power, etc) regardless of the actual sales made.

The gross margin (sales less the cost of goods sold) needs to be high enough to recover the fixed costs and make a profit.

2. Customers

What do customers expect or want from your product or service? Are they only seeking the cheapest price, or is value more important? Price may be part of the purchase decision, particularly where the customer is buying high-end goods.

You may need to consider the level of service or inclusions offered, and determine whether you are targeting the right market. Moving into a new market sector could make the business more profitable because it allows a higher price to be charged.

3. Positioning

Understand who your customer is to help you position yourself in the marketplace. Are you luxury and a high-end brand, or the cheapest, or somewhere in between? Once this becomes clear to you, ideal pricing starts to become a lot more understandable.

4. Competitors

What prices are charged by other suppliers? What are their inclusions and levels of service, who are their customers, and how is the competitor positioned? These give an industry benchmark and while your prices need to consider that benchmark, your costs are more important, you can’t stay in business unless your costs are fully covered.

5. Profit

Often business owners look only at what others charge and set their prices based solely on that research. But an important question that may not be considered is about how much profit you want to make. You should make a return on your time (a commercial salary), your capital (a return on invested capital), and your risk (the higher the industry or market risk, the higher should be the reward).

Many texts say you should be in business because either it is your passion, or to add value to the lives of others. However, you are entitled to add value to your own life. There is no one way of setting prices, it may start with an analysis to ensure recovery of your costs, determining the profit level you want, understanding of your customer needs, and finally your market positioning and competitive strategy.

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