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Whether you’re selling sweaters or charging for your handiwork skills, your price is one of the first things a potential customer will want to know. The right strategy can help you determine the price you need to set to generate sales and earn a profit. Keep reading to explore ways to price your product or service and keep in mind that your pricing strategy is essential to include in your business plan.
Choosing a Pricing Strategy What Are Overhead and Profit? Common Types of Pricing Strategies Cost-Plus Pricing Retail Margin Hourly Rate Value-Based Pricing Riding Down the Curve Pricing Penetration and Discount Pricing How to Get the Best Margin Pricing Tools and Resources
Pricing a product or service may seem simple, but there are many factors to consider when deciding how much you should charge:
What does your customer want?
What’s the market like?
What’s best for your company?
Two more factors that could impact how much you charge for your product or service are overhead and profit.
Overhead is how much it costs to start and keep your business running. This includes your start-up costs and working capital needs, including:
Profit is how much you make off your product or service after all costs are covered. Your total profit is what the Canada Revenue Agency (CRA) will tax you on at the end of the year.
The right price will need to be high enough to cover your overhead costs, as well as help you earn a profit. That’s why it’s important to determine both before choosing a strategy.
Tip: Determine your start-up costs and working capital (PDF) now with the Start-up Costs Calculator.
There are a wide range of pricing options to choose from, depending on your business. Keep in mind that you don’t have to go with just one—sometimes using more than one pricing model can help you get more sales. Here are six of the most common ones:
Cost-Plus Pricing
This is a popular strategy and a good starting point for nearly any business because of its simplicity. To use cost-plus pricing, tally up all your production costs, add a margin (a percentage of profit you want to earn) and multiply that total by how much you can produce. The number you get should cover your overhead and profit. If not, you’ll need to cut overhead costs, raise your margin or figure out a way to increase production and/or sales.
Pros
Cons
Retail Margin
If you are a retailer or wholesaler who buys and resells products, you’ll need to add a percentage—otherwise known as your margin—to the inventory you’ve purchased to resell. For example, if you buy an item for $100 and re-sell it in your store for $150, your mark-up is 50%. Your margin is different. This time you divide the mark-up profit of $50 by the sale price of $150. In this case your margin is 33% ($50 divided by $150).
Hourly Rate
If your business is service-based, consider charging clients by the hour. It’s much simpler than other strategies as you won’t have any physical costs of materials or inventory to factor in, though you’ll still have fixed overhead to cover.
An easy way to calculate your hourly rate is to add up all your overhead costs and divide that number by how many hours you want to work each week, month or year.
Value-Based Pricing
Whereas cost-plus pricing takes into account how much it costs to produce your product or service, value-based pricing considers how much your ideal customer is willing to pay. As a result, this method works best for businesses that offer specialized or unique products or services.
When using this strategy, keep in mind that customers will also associate your brand with your product. That means things like your brand’s track record, customer service and marketing could affect the value of your product or service.
Riding Down the Curve Pricing
This is a method where you charge a higher initial price and then lower it over time. Ideal for new-to-market products or services that don’t have much (or any) competition, the main benefit of this strategy is that you’ll capitalize on the initial high demand from customers and low supply due to lack of competitors. Plus, it could help establish brand loyalty from initial customers. As more competitors enter your space or your business becomes more efficient, you can lower your price.
Penetration and Discount Pricing
With penetration pricing, you would sell your product or service at a lower price for a limited time to attract clients. Similarly, discount pricing is likely a strategy you’re familiar with—it’s when brands offer sales, coupons or other markdowns to sell their goods.
No matter which pricing strategy you use for your business, aim to achieve the best margin possible so that you can break even and start profiting faster. Check out a few ways you could improve your margin:
Start-up Costs Calculator (PDF)
The Difference Between Cash Flow and Profit (PDF)
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