How to price your goods and services

‘Turnover is vanity, profit is sanity’. In my youth, I was carrying out an audit of a car dealership and overhead the salesman selling cars at almost cost price. In the short term, they got their commission and in the not too long term the business went bust.
 

Many businesses take a short cut on pricing to launch. They say they need to offer a discounted price to create demand for their product or service but there’s a problem with this approach.
 

I once gave a friend of my son’s a lift. When we got to his road I asked him how far down his house was. He said ‘about half way!’
 

To discount a price, you need to know what it should be in the first place. That means working out all the costs, whether they be direct or indirect, fixed or variable and then adding a margin to make a profit.
 

Now you know the price, you can discount it and work out your marketing costs.
 

Which one of these do you think is a better statement to include in your business plan?

• We’re going to sell the product at a discounted price of £50. When we hit £20,000 a month in revenues, we will increase the price to improve profitability.

• We have carried out market research and the product will sell at £75. We will sell the product at a discounted price of £50 to generate demand and estimate that this will take 3 months to get to 400 units a month at which point we will remove the discount. As a result, we estimate that the discount will represent a marketing spend of      £30,000.

So, we’ve established you should know your price. But how? Well, it’s not cost plus! You need to find out what the market will pay. What’s special about your product or what you do? If Apple had priced their iPod at cost plus, it would have been priced around the same amount as other mp3 players and they wouldn’t now have $205 billion in cash! (CNBC January 28, 2015).
 

So, what if the market will not pay enough? Then you need to fix your business model. Can you get your cost base lower, do you need increased volumes or is there something you can do to make your service or product different or special to increase the price?
 

Once you’ve decided, it’s time to do the maths.  You must know what you have to sell to break even. Only with good information can you make the right decisions. And, make sure you include all the costs.
 

So many times, I have been told that a business is breaking even and I then discover that the owner is not taking a salary.  If you aren’t taking out a reasonable fee for your services, make sure you factor in the notional cost so you can measure your performance. This is an investment you are making in your business, often called ‘sweat equity’. If you don’t value it properly you will understate your investment and potentially lower your self-esteem.