DILEMMA OF A SMALL BUSINESS OWNER!!
Ask people to pay too much for your product or service and they will stop buying; ask too little and your profit margin slides or customers assume your product is poor quality.
Here’s how to set a perfect mix:
Know the market.
You need to find out how much customers will pay, as well as how much competitors charge. You can then decide whether to match or beat them. Simply matching a price is dangerous, though – you need to be sure all your costs – both direct and indirect – are covered.
Choose the best pricing technique.
Cost-plus pricing involves adding a mark-up percentage to costs; this will vary between products, businesses, and sectors. Value-based pricing is determined by how much value your customers attach to your product. Decide which approach is most suitable for your products before making a calculation.
Work out your costs.
Include all direct costs, including money spent developing a product or service. Then calculate your variable costs (for materials, packaging and so on); the more you make or sell, the higher these will be. Work out what percentage of your fixed costs (overheads such as rent, rates, and wages) the product needs to cover. Add all of these costs together and divide by volume to produce a unit break-even figure
Consider cost-plus pricing.
You will need to add a margin or mark-up to your break-even point. This is usually expressed as a percentage of break-even. Industry norms, experience or market knowledge will help you decide the level of mark-up. If the price looks too high, trim your costs and reduce the price accordingly. Be aware of the limitations of cost-plus pricing, because it works on the assumption you will sell all units. If you don’t, your profit is lower.
Set a value-based price.
You’ll need to know your market well to set a value-based price. For example, the cost to bring a hairdryer to market might be #2,500. But you might be able to charge customers #7,500 if this is the market value.