Are you Charging the Right Price?

It’s an impossible question to answer.

There’s no such thing as a right price.

There is, however, a range of prices for any given product or service, along which you can choose the pricing you decide is appropriate for your business.

You can choose to be low-priced to attract a high volume of clients (think Aldi in the world of supermarkets). Alternatively, you can be at the premium end of the pricing spectrum as a strategy to maximise your profits (think Waitrose in our supermarket example).

Of course, you can choose between these two, depending on the criteria you use to make your choice.

Perhaps you have a close competitor who you want to undercut. Useful if your service isn’t unique and you serve a highly competitive marketplace.

You may need a particular income per hour if that’s how you choose to charge for your services. Or maybe you’ve taken a more ‘scientific’ approach, calculating all your costs and then adding on the amount you want to make as a profit. More entrepreneurs should adopt this latter approach, even if to verify they are recovering all their costs and making a ‘true’ profit.

Economists have lots of fancy theories about pricing. However, in the end, it just comes down to two main types of pricing strategy:

1. Cost-plus, where all your costs are calculated, and a profit margin is added on top, or
2. Market-based, where your pricing is based on the prevailing rates of your competitors.

In an ideal world, the best approach is to use a market-based approach first, then verify this pricing level by calculating your profitability by using the cost-plus approach as a cross-check.

Part of the reason I suggest this is that many entrepreneurs often forget to include various elements of their costs in their calculations. These should include:
• all your normal living expenses, like rent/mortgage costs, energy and other utility bills
• your weekly shopping bill,
• pension fund contributions,
• not to mention needing to pay the tax man your income tax and National Insurance contributions, or your corporation tax bill, depending on your chosen legal business structure.

Conversely, if you’ve taken a cost-plus approach to your pricing as your starting point and come up with a price based on the recovery of all your costs and your profit margin, how do you know if that makes you ‘cheap’ or expensive, compared to your competitors? In this situation, verifying this is still important compared to your competition. Only then will you know if you’re undercutting them, possibly missing out on potential revenue, or are way above them, potentially missing out on securing a greater number of clients.

Despite all this, there is a ‘right-level’ pricing for your business after all.

It’s simply the level that your clients are prepared to pay you for your product or service! Like the value of a house or a second-hand car, in the real world, anything is only worth what someone else is prepared to pay for it.

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