We’re often asked about how to set prices, and with good reason – it’s one of the most important and impactful decisions you can make for your business. As this is such a large topic, we have written two blogs that follow on from each other and reference other pricing blogs. This is Part 1.
First, you need to work out how much it costs you to produce and deliver one of your products or services. Then you need to decide how much profit to add on top.
Although these two steps are rarely straightforward, they are both essential if you want to maximise your business’s bottom line.
Working out your costs per product sold
This is easier said than done for most businesses because different products will have different costs associated with them, but it is crucial to do, even if it involves a certain amount of estimation.
Be sure to include:
- Material and manufacturing costs, if you produce a product, as well as labour or time costs
- Supply and/or delivery costs, this is how much it costs to get your product or service to clients
- Marketing and sales: this can be complicated when different products or services require different levels of marketing and sales support, especially if there are loss-leaders in the mix. For example, a business might have a loss-leader which is supplied direct to customers and requires a high level of marketing and sales support, and a follow-on product which requires little in the way of marketing and sales. If your business is like this you may want to weight your sales and marketing costs differently against different products or services.
- Other overheads, including staff: as with marketing and sales above, you may choose to divide this cost equally between all products or you may want to weight it, but it needs to be included.
All these things have to be paid for through selling your products and services so you need to make sure you will make enough money to cover it all.
The figure you come up with is your baseline.
If you charge less than this (assuming you sell the number of products/services you plan to), you’ll lose money. Anything above this is profit.
Remember to also, factor in developmental costs: if your product or service took some initial up-front investment, this needs to be recouped. Whether you include these in your baseline calculations, or work out your break-even point once you’ve decided on a pricing strategy, you need to make sure it’s included somewhere.
So, you’ve figured out how much it costs to produce and deliver your product / service, and you have determined how much profit you want to add on top. Now you need to decide on your pricing strategy. Please go to our next blog, “How to set your prices effectively: Part 2 – Strategy”.
Ros Conkie is a KMS Marketing Consultant, who helps businesses set and execute their marketing strategies so they deliver success. Contact us for more information on how we can help your business.
Want to get more great marketing advice, straight to your inbox? Then sign up to our free monthly newsletter.