Setting product prices is one of the most important decisions that you have to make as a small business owner who sells products – but why is pricing is so important?
Firstly, your product prices are important because they’re related to your profit from your sales. You make money in one place of your small business – and that’s the difference between what you buy something for and what you sell it for.
Your selling price has a huge impact on the amount of money or profit that you’re making every time you make a sale. It’s impossible to build a long lasting product business if you’re not making enough money every time you make a sale.
Pricing is absolutely key and you don’t want to get it wrong.
1. How do you know where to set your product prices?
I know it can be difficult to set your product prices when running a small business. I find it fascinating because pricing rolls into so many different elements for small business owners – and reflects your beliefs about yourself and your small business.
Pricing challenges your thoughts about money and what you think you can charge for different products. You’ve got to try and set a price that makes you feel comfortable.
Working out the price is part art and part science but there are a few basics principles that are important to apply.
2. It’s not about price, it’s about value.
There is a school of thought that says that the price you charge should be your costs times a certain factor in order to get your product price.
That’s a useful rule of thumb but taking that approach neglects one critical question – what is your customer prepared to pay for a product?
And what your customer is prepared to pay – is what they believe is a reasonable value for your product.
Value is the combination of quality, style and price and they are the 3 factors a customer considers in a product to assess its value. It’s essential you convey simply and consistently to your customers – the value, quality and style of your products.
For handmade products – tell them about the inspiration you had when you were making it or show pictures of behind the scenes. This will help reinforce that your goods are worth more than a mass produced product.
It’s all about the customer’s perspective when it comes to quality. For example – you may know that a certain stitch that you used on a garment costs twice as much as another stitch because it’s a slower technique and it takes more hours. Your customer is likely to be totally oblivious to the difference between one stitch and another – you need to explain in detail why it’s superior and sold at a premium.
Even if goods are not premium, they have to have a basic level of quality that is acceptable to the customer. Poor quality goods are a very quick way to lose business, no matter what your price.
Style – know your customer and make it irresistible.
Style is the most subjective of all of the elements that make up value. We each have our own style, and a vase that will have your aunt pulling out her wallet with excitement might leave you cold. And yet, it’s the most powerful element of a product.
We’ve all had that moment where we’ve walked into a shop and seen something that we don’t need but that we MUST have. We’ve either splurged there and then, or we’ve gone home, fretted about it and ended up buying it later or suggesting someone give it to us for our birthday!
If you can create product that produces that feeling in your ideal customer, you immediately create what is known as “price elasticity”, or the ability to stretch your product prices higher.
The more you know about your customer, and the more you can put yourself in their shoes, the more likely you are to create a product that is irresistible to them.
3. Be careful not to underprice
A lot of people get the fear of rejection and then it’s very easy for you to under price your products.
Underpricing – which is charging less for products than the market value – is something that is very, very common in small businesses, especially when you’re starting out.
You need to ask yourself, am I absolutely sure that I’m charging enough for my products? You’ll consider how much can your audience afford, you’ll think about rejection if you set your product prices ‘too high’.
If you are not sure how to price your products the best thing to do is to be as objective as possible. I have many stages I go through when I’m pricing products – in The Resilient Retail Club I go through a seven step process for setting your prices – if you’re a member take a look at that but it’s basically all about how can you be strategic. How can you be objective when looking at your competitors, looking at what your customers want to pay and using that information to help you set your prices so that you’re not relying on a what you believe you should charge, which could often lead to under charging.
Your pricing is absolutely critical. Make sure you get it right. Don’t assume as well that you’ll only make a sale if you charge less for your products.
If you underprice your products significantly, you can actually affect how your customers think about your products – especially in terms of quality as that leads to customers making assumptions.
4. Learn from competitors
No business operates in isolation, so be aware of the market product prices.
Analyse what your competitors are doing. Look at their pricing to help you build a benchmark for your product pricing.
Every retailer will spend the same number of days a year going out and looking at what the competitors are doing and reviewing their websites. It’s an important process in the industry and can be a very valuable way of understanding how you measure up.
But don’t follow a formula – understanding your competitors is good business sense. However you don’t have to follow a formula. You can have your own pricing and it can even be a point of differentiation between you and your competition.
It comes back to value.
Do you believe you have a superior product at a great price? If the answer is yes then that’s a great point to communicate to your customers. If your product is worth more, then charge more – but make sure you are telling your customer what makes it superior – focus on sharing your wonderful story, materials and quality with your customer.
5. Talk to your customers
When was the last time that you sat down with your ideal customer to chat about their buying habits?
Ask people what they have bought in the past instead of asking them if they would pay a certain amount of money for an item, as people tend to be aspirational in their answers.
In other words, if you say “Would you pay £125 for this t-shirt?” they are most likely to answer “Yes”, but if you ask them “how much were the last 3 t-shirts you bought” and they say £20-25, then you have a better idea of the real product prices they are prepared to pay.
Remember though – a fact of life for small businesses – there’s always someone who will think your products are overpriced. Be sure to build up a picture from your customer base – not just one isolated piece of ‘feedback’.
6. Psychological barriers
Pay attention to psychological price points such as £10, £20, £50 or £100. For example, it is much better to price at £99 than £102. One is under £100, and one has gone over that psychological barrier.
Avoid “odd” and inconsistent prices. Try and streamline the number of different price points that you use. For example, having items at £12, £13 and £14. Can you just group them together at one price point?
The clearer and easier the price architecture is, the less confusion there will be in the mind of your customer.
Check that every part of the customer journey conveys the value in your product – from the product descriptions, to highlighting the making process, to how you package the goods for sale.
7. Are you making any money?
I’m a firm believer that you need to set your product prices by looking at what is right for your market and your customer, rather than taking your cost price and multiplying it by a factor which could result in your retail prices being unrealistic.
However, in order for your small business to thrive, once you have set your product prices, the next step has to be to calculate your profit margin.
The profit margin is the % of the selling price that is profit. So if you sell a £10 product that is £7 profit, your profit margin is 70% (assuming that you are not VAT registered).
As a rule of thumb, your profit margin should be at least 50% if you are selling directly and 70% if you want to sell at wholesale.
8. Theory until you start selling
Ultimately, your customer will dictate your pricing. You can spend many hours theorising over the best price points, but what you want to do is get your products out there and start selling. You can always adjust prices – although I suggest leaving 4-6 weeks before changing anything so that you have time to review your sales.
Are you selling very little? Don’t assume that this immediately means that your prices are too high, unless you know for a fact that you are considerably more expensive than your immediate competitors (e.g. those of a similar quality to you).
Ask yourself instead if you are doing enough to communicate your quality and value to your customers.
Could your product prices actually be too low? Customers make assumptions about your product based on the price, so if you’ve set the bar too low, they might assume your quality is lacking.
On the flip side, if you are selling an item very quickly (faster than you can get it back into stock for example) then this is usually a sign that there is room to increase your prices.
So there you have it – my tips on how to set your product prices.