Your business: Here's how to price your products

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Determining a price for your product or service must work for your business and your customer. Here's what to keep in mind.

Pricing the products or services you offer is a big decision that needs a lot of thought and careful planning.

Too high and you risk losing customers. Too low and you could lose money or give the impression that your product is cheap quality. So, how do you get it just right?

Step 1: Think about your customer

Who is your ideal target market? Think about their preferences and how sensitive they are to price. Does your clientele seek a premium product that’s priced at the higher end when compared to competitors – and if so, can your product offer the additional value to justify the cost?

Or, is your customer a bargain hunter who can’t resist a good deal? In this case, you’ll be looking at ways to keep your prices competitive. Today’s consumer is well-informed and can usually shop around for price comparisons at the click of a button.

Think about car manufacturers: the cost of a Range Rover and a Polo Playa are vastly different, even though they are both vehicles that need to get a person from point A to point B. Is your product the Range Rover of your industry, meaning you’ll sell less of it at a higher price or are you selling a "Polo Playa" (to more people but at a lower price)? 

Step 2: Work out your costs

How much does it cost you to produce or purchase the item you are selling or to offer the service you provide? Note every cost linked to getting your product into your customer’s hands. This includes raw materials, labour costs, operating expenses, delivery, marketing, etc. Then think about how many products you’ll be able to produce as a result of these. Divide your total costs by the number of products and that will give you a cost per product.

This is not your price, but it gives you a starting point. You now know that your selling price has to be higher than this number for your business to be profitable.

Step 3: Choose your strategy

There are a few different models businesses use to determine their prices. Spend some time researching the different approaches and choose the one that best suits your business strategy and goals.

Here are a few options:

  • Cost-plus pricing

This is possibly the simplest and most common strategy. Based on what you established in steps one and two, you need to set your profit margin and mark up the price from the cost per product you calculated.

For example, if it costs you R10 to produce one product and you decide on a profit margin of 20%, it will look like this:

Cost per product: R10

Profit margin: 20%

20% of R10 = R2 (your markup)

Selling price (cost per product + markup) = R12

 Tip: There are profit margin calculators available online if the numbers are difficult to work out. 

  • Undercut competitors

If your price is your USP, you could study the market to find out what your competitors are charging and then beat their price. Just make sure you don’t slash your prices to a point where you start making a loss. Also, keep in mind that bargain hunters don’t make for loyal customers as they’re only interested in whoever offers the best price. 

  • Determine the value you offer

Value-based pricing involves setting the price of your product or service according to what customers are prepared to pay for it. Are you offering something that no one else has? Is your product, service or guarantee superior to others on the market? What value does your customer attach to your product or brand?

  • Dynamic pricing

Also called demand pricing, this strategy entails the cost of your product or service varying according to when and where it’s sold. (Consider how much people were paying for beer and cigarettes being sold illegally during lockdown level 5…) You’ll have to be in tune with demand and supply trends to get this right.

Remember, your price is not something that can’t be changed. You can (and should) test it and change it as you go, so you don’t have to get it perfect from the start. 

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