How to succeed with pricing
Getting your pricing right in business can be tricky, and it’s all too easy to get it wrong. More often than not, business owners underprice and leave money on the table. This is because business owners typically worry more about prices than the customer does. The customer is normally more concerned about other factors like reliability, honesty, getting the job done right first time, punctuality, speed of service or response, and willingness to put things right if they go wrong.
How do you set your prices?
- Cost plus: There are many variations here, but basically you work out your annual overheads and add the required net profit to calculate the necessary turnover, having adjusted for any mark-up on purchases, and materials or parts. Then break down the turnover into chargeable hours, products sold or cups of coffee made. This a useful method, but it can give you the wrong answer, as demonstrated by a costing exercise carried for a new café by a local accountant. After spending many hours working it all out, she came to the conclusion that a coffee should cost $8, nearly twice the going rate!
- Market level pricing: Mystery shop the competition; find out what their prices are; and copy them. It’s all very well in theory, but there are so many other factors to consider. For example: do they have a really good USP (unique selling point); a loyal, well-off, long-established customer base; or a great reputation, none of which you enjoy? Or do they have low costs or low aspirations, meaning they give it away?