Deciding what to charge for your products or services is one of the most important decisions you need to make when running a business. Charge too much or too little, and you’ll either fail to attract customers or fail to turn a profit. In both cases, this could be a disaster.
In this article, we’ll offer some guidance into how to set your pricing, look at a few different strategies you can use, and cover a few of the consumer laws you’ll need to be aware of.
Knowing your numbers
Before you decide on a price for your products and services, it’s important to know a few things:
- How much it costs you to produce the product or service
- The value your customers assign to your product or service (i.e., what they’re willing to pay)
- How many units you expect to sell, or hours you expect to work
- What your competitors are charging
- How much money you’ll need to make overall to be profitable
You need to set your pricing high enough to cover all your fixed and variable business costs and make enough profit to pay yourself, but not so high that you drive customers away.
Pricing strategies for your products or services
There are several different strategies you can use to set your pricing.
Cost-based pricing: You calculate how much a unit costs to produce and then add a percentage markup. It’s an easy and straightforward way to set pricing that can help you justify any increases you need to make.
Value-based pricing: You set your pricing based on the value your customers place on your product or service. For example, it might only cost a plumber a few dollars in petrol and parts to fix a leaking pipe, but the value to the customer of not having a flooded house is much greater. This pricing strategy is good for service providers.
Competitive pricing: You base your prices on what your competitors charge for the same product or service. While this means you need to research your competition regularly, it also helps you identify or develop points of difference for which you can charge more. Check out our blog on easy ways to monitor your competition for free.
Price skimming: If your product is new to market or unique, you initially set your price high to capitalise on demand and lower it as you gain competitors. While this strategy can work well for the right product, it carries an element of risk if similar products come onto the market too soon after you launch.
Penetration pricing: You set your price low to gain market share and then increase it. This strategy is good for generating a lot of early sales but can backfire if you fail to retain those customers, or your competitors drop their pricing to match, leaving you stuck at the lower price point.
Consumer law and pricing
New Zealand has robust consumer laws to protect customers from unscrupulous traders, and it’s important to know what they are to avoid accidentally breaching them. In terms of setting your pricing, there are a few important points to note:
- If you advertise something as being on sale, it has to genuinely be lower than the normal price for a limited time.
- Whenever you advertise a special, it has to be cheaper or have additional features or benefits that are not normally available.
- If you say your item is cheaper than your competitors, you must be comparing it to exactly the same product
You can find more information at the Commerce Commission website.
Once you’ve decided on your pricing, you’re going to need an online presence and possibly an ecommerce platform through which to sell your wares. Moreweb can help you with that – discover our easy and affodable small business solutions.
