It's a hard task for a business to put a price on its products and services. After all, you can only charge a price that customers are willing to pay, but you also need to make sure that your prices are covering all of your costs and meeting your own business goals.
So how to find that right price? Here are two simple pricing techniques that can help you make sure that you’re covering your costs:
Cost-plus pricing method
At a basic level, your price should cover all of the costs of your product or service, otherwise your business will lose money. You can use your costs to set your prices with a technique called cost-plus pricing.
To calculate your price using the cost-plus technique:
- Add up all the costs associated with selling one unit of your particular product or service. Don’t just include the materials you used to make the product, but also delivery, postage, and a share of general business costs such as accountancy fees, and heat and light. Don’t miss out your own wages or drawings, either.
- Once you’ve added up all these costs, think about the “mark-up” you want to charge. This, broadly, is how much profit you want to make. On a product that costs £10 per unit to make, if you add a 20% mark-up this will be £2, so the sale price per unit will be £12.
What mark-up should I use?
There is no right or wrong answer about what mark-up you should use in your business - average mark-ups vary from industry to industry, so for example, check out this guide of retail mark-ups to see how diverse mark-ups can be. The most important thing is that you choose a mark-up that’s right given your own business needs and the marketplace you operate in.
If you’re looking for more detail about the cost plus pricing method, check out Joanne Dewberry’s excellent book “Crafting a Successful Small Business” This book focuses on the crafting industry, but its lessons about pricing will be very useful for most businesses.
Overall return pricing method
How much money have you put into your business, and do you want to get that money back quickly? The overall return pricing method helps you price your products with the aim of making back your original investment.
To calculate your price using the overall return method:
- Add up how much you’ve put into the business so far - for example, if you’ve spent £5,000 on the day-to-day running costs of your business and spent an additional £3,000 on equipment, your total investment would be £8,000 so far.
- Add up how much your total costs will be to produce your product or service for that year. Let’s say this is £7,000 in the first year.
- Add the two numbers together - so to pay yourself back your investment and cover all your costs, you need to make sales of £15,000.
- Divide that total by how many units of your product you want to sell, and hey presto, you know how much each unit will be sold for.
Of course, if you have made a significant up-front investment in your business, it may be unrealistic to cover all of your investment in one year’s worth of sales - to address this, you could use this same technique and split your investment cost over a number of years.
Pricing is a delicate balance between you and your customer - with these calculations, you can make a more informed decision about what price your business needs to charge, not just what the customer is willing to pay.