How to price your product or service

Your product or service is ready - now you’ve got to market and sell it. Getting the price right is important, both for your bottom line and to your target customer.

Pricing is never (or certainly shouldn’t ever be) random. While it can be helpful to look at what competitors are charging - as this will give you an idea of what your potential customers will be willing to spend - it can help to start by reviewing your overall business costs.

Calculating your business costs

Begin by totting up your business costs, both fixed and variable.

Fixed costs

These tend to be costs to your business that do not change, irrespective of your business activities. They’re costs you expect to remain consistent over the year. Examples of fixed costs include:

• Accountancy costs
• Business insurance
• Permanent employee costs
• Storage costs
• Website and/or premises costs

Variable costs

These are costs which can change frequently. Some will be within your control (e.g. advertising and marketing costs or event attendance costs). Others will not be (e.g. shipping costs and credit card fees). Examples of variable costs include:

• Advertising and marketing spend
• Affiliate commission
• Credit card fees
• Event attendance (e.g. craft fairs)
• Shipping costs
• Temporary employee costs
• Utilities
• Wholesale products

Once you’ve figured out all your costs, it's time to work out how many units of your product or service you would need to sell in order to meet these costs. This can be done by carrying out a breakeven analysis.

Understand your market

Once you’ve calculated your breakeven point, it’s time to get back to market research. Carrying out a competitive analysis can be a good way to start and will inform not only your pricing strategy but marketing and product development too.

It may also be a good idea to carry out some of your own original research to really understand what your target market is willing to pay and what they expect from your product or service. Conducting an short online survey may be the cheapest and quickest way to do this.

Work out your net profit margin

Now that you know both your breakeven and understand the competition you’re up against, it’s time to build profit into your pricing. While an average net profit margin is around 10%, net profit margins really vary by industry and product or service, so bear this in mind.

Remember: the prices you set today, won’t be forever. While it’s important to make sure your prices set you up to be profitable - and don’t put off your target market - you can and should experiment with your pricing!

Glossary of pricing terms

Fixed costs

Constant business costs that don’t change, regardless of business activities.

Net profit margin

The amount of income left after all costs are subtracted from your gross revenue.

Example of Profit Margin Joe’s Coffee recorded revenue of £200,000. Gross profit and operating profit clocked in at £70,000 and £30,000 respectively. The net profit for the year is £25,000  How to calculate the profit margins for Joe’s Coffee:

• Gross profit margin = (£70,000 ÷ £200,000) x 100 = 35%
• Operating profit margin = (£30,000 ÷ £200,000) x 100 = 15%
• Net profit margin = (£25,000 ÷ £200,000) x 100 = 12.5%

Profit

The amount of money gained, after subtracting business costs.

Revenue

The gross income generated from your business operations, before any costs are subtracted to determine net income.

Variable costs

Costs that change, according to business activities.