How to price a product: A guide for small businesses

Whether you are starting a new business, launching a new product, or revisiting the pricing of an existing offering, it is essential to decide on pricing which will keep your business competitive whilst ensuring a profit. A set of simple steps and practical strategies can help you to effectively set a price with confidence.

Continue reading our simplified guide to learn more about how to price your product as a small business.

1. Research your market

Before you price your product, you must understand your market. Explore competitors which sell similar products to your offering, making sure to analyse their prices, compare product features, and assess customer willingness to pay those prices. Identifying a gap in the market can help you to determine your marketing positioning, for example, will you be offering a budget option of a product, or are you offering a premium service to clients?

2. Identify your target audience

After you have conducted market research, you can determine who your target audience is. An article from SumUp shares that by understanding who your target market is, their budget and how much they typically pay for similar products, you will be able to be in a better position to price your products competitively.

3. Calculate your costs

Add up all the costs associated with producing and selling your product. Commerce platform, Shopify, advises how these costs will include fixed costs such as rent, salaries, and business insurance, and any variable costs such as packaging, shipping, and sales commissions. Once you have finalised your costs, you can calculate cost per unit, followed by adding in a profit margin.

4. Set your price

To set your price, choose a common pricing strategy from the section further down in this article. For example, by using the cost-plus pricing strategy, if your total cost per unit is £10 and you would like a 30% profit margin, your selling price would be £13. Make sure to communicate your pricing with your audience and, if feasible, take the opportunity to test your prices, such as using psychological pricing where prices end in ‘.99’, to see which is most effective. When you arrive at your purchase price, ensure it is competitive, covers your costs, and aligns with your brand positioning.

5. Review periodically

Regularly reviewing your pricing is essential to respond to any changes in your market, fluctuations in costs (such as supply costs), and evolving preferences of your target audience. Monitor how your sales are performing and request feedback from your customers to assess if your pricing is still attractive. You may also need to adjust your pricing in response to competitors or to reflect improvements to your product. 

Common pricing strategies

Professional network for product marketers, Product Marketing Alliance, shares common pricing strategies which are tailored to different objectives and market conditions, and can be used by various businesses to price a product.

Competitive 

Competitive pricing includes setting a product’s price based on what competitors in the same industry are charging for similar products. By matching, undercutting, or slightly exceeding competitors’ prices, small businesses can aim to attract customers which already exist within their market. This strategy requires regular monitoring of the respective market to remain effective.

Cost-plus

Cost-plus pricing involves calculating the total cost of producing a product and then adding a fixed percentage or amount as profit. This strategy ensures all expenses are covered and provides a straightforward way to set prices; however, it may not always reflect any changes in the market or customer willingness to pay.

Value-based

Value-based pricing determines the selling price according to the perceived value to the customer, rather than the actual cost of production. This approach considers factors such as brand reputation, unique features, and customer benefits, where buyers recognise the superior value of the product.

Penetration

Penetration pricing initially sets a low price to quickly attract customers and gain market share. Once the product is established in the market and has gained an audience, the price can gradually be increased. This approach is particularly effective when launching a new product in competitive markets, encouraging customers to acquire rapidly, as well as building brand recognition. 

Price skimming

Price skimming strategies initially introduce a new product at a high price, targeting early customers which are willing to pay a premium. Over time, the price is typically reduced to attract a broader audience. This strategy helps to recover start-up costs quickly and capitalise on early interest before any competition potentially increases. 

Target costing

Implementing a target costing strategy begins with a desired market price, then works backwards to ensure the product can be profitably produced at that price point. Businesses which use target costing pricing focus on controlling costs during design and production to meet profit objectives, often requiring close collaboration across all production departments. 

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Please note: This article provides guidance for information purposes only. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Markel Direct. Markel Direct is not affiliated with any of the brands, companies or websites mentioned in this article.