This is a follow up on a previous article that explored how small businesses should think about their pricing. I have been hunting around for a simple yet sound costing sheet that will make sense for the emerging entrepreneur that is trying to work out where they should pitch their prices. At the end of the day, and after running the maths by the methods shown below, you will be able to make a well-informed decision about where you would like your products to sit in the market place.
The nuts and bolts of how to use different methods are explained below. Not only are these useful tools helpful to set pricing, they are also an useful tool to determine costs for start-up business plans. Your business backers will expect to know your figures inside out so it pays to know where and how the projected income is likely to come from.
The full fact sheet is accessible from the Auckland Chamber of Commerce. They have an excellent online resources library that includes a big majority of business issues you may be grappling with. Please click through to see worked examples with real costings of the methods described below.
There are four basic methods that you can use to determine the selling price of your product or service:
Cost plus pricing
After calculating the actual cost of your product or service you add the desired amount of profit to reach the selling price.
Prices using this method are determined by a combination of sales volume (ie. units or a dollar amount of what you actually sell) and desired profit (ie. profit left after subtracting the cost of the goods and doing business). You need the ability to calculate in advance the price that generates the optimum ratio of profit to volume.
There are times when the market establishes the price for your product or service. At times like this you are best to follow along with this price. It is important under this pricing structure to track what your competitors are charging, and find out how price aware your customers are.
This method generally involves adding a mark up to the ‘into store’ costs of products. It is not usual for this to result in a recommended retail price determined by the market. Different products can have different mark ups depending on supply and demand or market position.
How are you going with your pricing? Are you confident going to market? Please leave me a comment.