22 July 2011
"How much should I charge?" is one of the questions most frequently asked by my clients.
Coming up with the "right" price is a mixture of 'science' and ' art'. There are many ways to calculate a price: cost-plus, premium, competitive or psychological pricing for example. In fact Wikipedia lists no less than 18 ways to calculate the price of a product!
In my experience small businesses tend to under-price their products. So where do I start with my clients?
The 'science' - how much does it cost you to get your product or service to your customer? This is the minimum price that you can set for a product or service without losing money. The true cost of a product is the cost of the materials + the cost to assemble and distribute the product + a share of all the overheads of the business + a salary for the business owner. Many young businesses underestimate the true cost of their product because, for example, they do not include money towards overheads or money to cover their own effort – even if they choose not to take a salary out of the business.
The 'art' What is a 'fair' price for your product or service? This is the maximum price that you can charge for a product or service without losing a lot of sales. When thinking about a 'fair' price consider the benefit your customer will be getting from your product – the minimum price for your product may work out as £10 but if it saves the customer that much on a monthly basis they may well be prepared to pay 3-4 times this amount.
So how much should you charge? Well, do you understand your numbers? Do you understand your product's value to your customers? Your price lies somewhere in between.