How to price your products and services

As a business owner, pricing is an important responsibility. We outline how you could:

• Set the right price for your products and services – not too high to deter customers, but not too low that it puts your profitability at risk
• Defend and justify your price to customers (to avoid the temptation to give away your margin by offering discounts to get the sale)
• Know when – and how – to raise your prices.

Many businesses don’t have a proper pricing strategy – so it’s not surprising they often struggle to set their prices. Even worse, without a pricing strategy your prices may not produce enough revenue to meet the costs of your business.

Before you delve into a pricing strategy, it’s essential to do your due diligence when setting your pricing. That means being clear about how much profit you want to make, your costs, what your competition is charging, and what your customers would be willing to pay for your products and services. 

Working out how much you need to make to break even is a useful starting point. Our break-even calculation can help you establish the minimum income you need to stay in business.

Once you have a good idea of what you need to break even, what your competitors are doing, and how much your customers would be willing to pay for your products and services, you can choose a pricing strategy based on these factors. 

There are a few pricing strategies you could choose from depending on your business objectives and what type of business you are. Below are some of the different options.

This is where you calculate the cost to produce your product or service, then add a mark-up. Many business owners favour this strategy because it’s simple – all you’re really asking is how big you want your margin to be.

But there are other ways to price. For example, you could price competitively by looking at what your competition charges and setting your price based on that. You could choose to match your competitor, or perhaps it makes more sense to undercut them – although beware, as this could backfire (see below). 

With value-based pricing, you set your price based on what your customer thinks it’s worth. This strategy requires you to really know and understand your customer so you can price accordingly. And if your price doesn’t work – in other words, customers aren’t buying – you don’t necessarily have to lower your price. You could look at other ways you could deliver value to meet your customers’ expectations.

This pricing strategy is often used by businesses when they’re introducing an innovative new product to market. With price skimming, you set a high price to capture ‘early adopters’, then as the product becomes more mainstream and the excitement drops off, you lower your price to capture a broader market.

The opposite of price skimming is penetration pricing – starting your product or service at a lower price and raising it later when demand rises. This can be an effective strategy if your goal is to build a customer base, or if there are many similar products in the marketplace – a lower price can convince customers to try your brand over the others.

If you’ve done your homework, you can be confident in your pricing strategy – but you need to instil the same confidence in your customers. Here are some tips on how you could make your customers happy to pay the price you’re charging.

There’s more to a product than price alone. Things such as quality, productivity, guarantees, fast delivery or free installation are all of value to customers. Identify the areas where your product or services adds value, communicate these to your customers, and make sure your staff do, too.

Customers are often willing to pay more for products or services that solve their problems or frustrations. For example, people are often frustrated by tradesmen not turning up on time. Many customers would be happy to pay a higher price if you can guarantee that you’ll arrive on time – or it’s free.

People often research prices online and expect businesses to match online competitors. You could counter this by focusing on the worries and issues people have with internet purchases – for example, delivery costs, returns, warranties, and the ability to try before you buy. Show them how buying from you could avoid these issues.

If your existing or prospective customers query your price, don’t automatically offer a discount. Not budging on price might reassure your customers that you’re the right business to deal with. Remember that customers who are focused solely on price may not be very loyal or profitable. Consider how important the customer is to you, and the likelihood of ongoing business from them, before offering a discount.

If a customer challenges you on your price, don’t take it personally. Instead, explain in a professional and friendly way why your product or service is worth the price, it will go a long way towards winning people over.