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4 tips for price setting for beginners
A business exists to make money – none of us want to work for free – so price setting is a key part of any business. Yet, many people – even those with considerable business experience – find setting the price of their product or service tricky. There are so many factors to consider, and several different ways to set your pricing.
An important part of price setting is factoring in our own time and worth. Lots of people undervalue themselves. Those of us who lack confidence, and have low self-esteem and plenty of self-doubt, are even more likely to underrate our skills and abilities.
This article looks at the four things you need to take into account when setting your pricing. It includes not only costs but market rates, positioning, desired perception of your product or service, and that all important self-belief. Another article will look at the different strategies you can use to set your prices.
The most basic consideration for setting pricing is costs. There are several different types that need to be taken into account, and which all need to included when figuring out your charges. These are:
- Direct costs – this is not only the cost of materials, equipment, or product; but also less obvious costs such as shipping, the cost of storing stock, transport, and marketing.
- Overheads – overheads are costs that may not directly relate to the product or service, but which will be incurred to provide them. Such costs include insurance, premises, utilities, and business rates.
- Labour – even if you don’t employ someone, labour costs are relevant. Your time and labour is valuable and needs to be covered. Employers need to consider not only the direct cost of wages or salary, but also taxes, benefits, and legal obligations.
Costs may be fixed or variable. Utility costs, for example, tend to vary with the time of the year. It’s easy to factor in fixed costs, but variable costs are harder to allow for. To work these out, take an estimate of the annual figure, allowing for any peaks and troughs. This figure should then be divided by twelve. Variable costs will need to be reviewed over time as bills come in to make them more accurate.
The website BPlans provides a range of free-to-use calculators for all stages of your business. This includes a tool for working out your starting costs and a break even calculator. Check out what’s available here.
2. Know your market
You cannot price your product in a vacuum. You need to know your specific market, who your competitors are, and what your potential clients are likely to pay. You need to know what are your competitors charging? If you’re not sure, use price comparison websites, or be cheeky and ask friends and family to request quotes.
However, while the market’s pricing should form part of your strategy, it should not be the deciding factor. Your role within your specific market will play a part. This is known as positioning.
3. Positioning and perception
Price is not only a way of making a profit: it also has a psychological effect. Price communicates how customers see your product. A low price will suggest cheap and poorer quality, while a high price conveys quality and aspiration.
Businesses need to decide where they see their product fitting in the market. Are you looking for volume sales, or fewer sales with higher profit margins? Do you want to be at the high end of a low value market, or the low end of a high value market? How common is your particular product? The more niche or specialist within your sector, the more you can charge.
4. Self confidence
Many small business owners underestimate their value, especially when they doubt their abilities. They’re not confident in their personal value. As a result they undercharge. When thinking about your value, identify what makes your business special and unique. Is it your knowledge? After sales care? Exclusivity? Appreciate yourself, your time, and your product. Don’t undersell yourself. Be confident. If you’re struggling with this, why not ask a friend to help? By explaining what you’ll be doing and how you’ll be doing it, they’re more likely to see the value that you’re offering.
Now that you know your costs and your market, and have identified where you see your business in your particular sector, it’s time to set your prices. The next article details the different options available.