Everything You Need to Know About Pricing a New Product or ServiceWritten by Uwe on March 30, 2015
Whether you’re a new business launching your first ever product or service, or simply adding a new addition to your range of products or services, pricing is one of the most crucial aspects. It closely ties in with your production and marketing, which helps determine the price you need to set. The right price can really make or break sales and define the future life cycle for your product or service. On one hand it’s essential that you make enough profit to allow your company to continue running and on the other hand you need to make sure your price isn’t a figure that will scare away potential customers. Thus getting it right is paramount.
The basic no-brainer method
This quick guide will give you a nutshell of what you need to consider to make sure you are pricing your product or service right. So to begin with, an analysis of your revenue versus profits is important. The first thing you need to know is at what point will you be breaking even and from what figure onwards will you start making a profit. Start by adding up all your costs that went into the product or delivery of your product or service. This should include office space rent, employee wages, utility bills, suppliers’ costs, product materials, etc. The final cost figure that you reach after adding all this up is the break-even point. If you make anything less than that, you are going in a loss. So taking this as a starting point, you can decide on a percentage of profit that you’d like to make and add it to the total cost. Let’s say your monthly costs are £10,000 and you wish to make a profit of £1000 every month. To achieve this profit level you simply need to set your product or services at a price that can bring in a revenue of £11,000 every month. This here will also assist you in giving a minimum figure in terms of sales that you should aim to achieve. For you it might mean that selling at least 10 products will bring in a sale of £11,000.
The perception bar
This technique takes into consideration more than the cost that goes into making your product or service. Here we apply a bit of marketing. As professionals we want our customers to perceive our brand or company name in a certain way. You need to consider who your target market is. Are you catering to the upper class, medium brand, conscious but moneywise customer, or the cheap bargain lovers market? All these categories consist of a different kind of customer that is looking for something different than the other. The upper class customer is more conscious about the brand name and wants to pay a premium price for something that sets him or her apart from the regular buyers. To cater these customers you will ideally price your product high while making sure the quality and brand reflects that luxuriousness your customer is after. For the lowest level consumers who are looking for a bargain product, you are competing against lots of other companies in an attempt to offer the cheapest product. Here you have to stick to the first method and simply make sure you are breaking even while bringing in the maximum possible profit level.
The payment structure
Not all products are services that can fit in one payment style as highlighted above. Lots of products and services especially are paid off gradually. If you find your product or service to be of a similar nature, this is the technique you’ll be going for. Let’s say you are offering a service of building a website for your customers or clients. In this case you have different payment structures to set, depending on what works best for you. Do you want to charge upfront the full price of the website or would you like to take a down payment as a deposit and then allow your customer to pay off the full price gradually over weeks or months, depending on how long the development of the website will take? This technique lies solely on what your personal preference is and what technique is most popular in your target market. Keeping an eye on the pricing structure offered by your competitors will help you to keep your edge and beat the market.
The tiered pricing strategy
This pricing model is best explained by defining the air travel marketing. We have economy class, economy plus, business class, first class etc. Here you are offering different levels or tiers of your service or product and then pricing it on different levels. This way you can target different types of customers while offering a range of additional services that your customer can easily opt-in or out of. This expands your target market giving you more opportunity to bring in additional sales and profit. This kind of pricing is also frequently found in online software purchases where you can purchase the online tool for a month or a year which allows you to use the product on multiple devices.
Pitfalls to avoid
With pricing there are different techniques and methods you can play around with but nothing beats simplicity. Complicated pricing tiers, discounts, and other conditions can lead to your customers being confused, agitated, and angry thus leading to a loss of customers and a dip in your sales. People have so many options to choose from these days, and the slight bit of confusion can easily turn them to your competitor. Thus it is equally important that you keep your pricing principles clear and easy to understand.
One of the problems businesses often encounter is VAT. With many B2B services, companies choose to quote their prices exclusive of VAT, thinking that their customer will be VAT registered. However, those businesses that are not VAT registered, are then taken aback by the 20% increase in price which is the VAT they have to cover.
This is why it is important that you clearly state in your pricing whether it’s inclusive or exclusive of VAT. Even better is to explicitly state the basic price and show the additional 20% VAT cost and then give your customer a final figure.
If you have an online business, try avoiding what most companies do, adding additional charges in the basket in the last stage of payment when the customer is ready to make the purchase. This basket shock technique really puts off customers and you risk losing their trust. Thus it is always a best practice to keep pricing very clear from the beginning to avoid last minute surprises.
Following these basic pricing strategies and tips can help you to get started on pricing your new products and services that best suit your company’s needs.