Three Simple Steps For Product Business Owners to Set Their Pricing CorrectlyPosted on 3rd March 2023
Catherine Erdly, founder of The Resilient Retail Club, gives essential advice on product pricing
Part of having an effective profitable product business relies on you being on top of your prices. That means reviewing them regularly and looking at where you might be able to increase them, responding to product cost increases and monitoring what needs to be adjusted.
For some businesses, reviewing prices will be an easy exercise because you buy products from another business, in which case you will have a list of recommended prices, or RRPs.
For those that set their own prices, this part can be a minefield. It is often one of the hardest tasks for businesses who are first starting out, because pricing inadvertently reflects your beliefs about yourself and your business.
The best approach is to work through a logical process to ensure that your prices are correct for your customer and for your competitive market. Once you have done these exercises, then you can check your profitability.
A three step process for setting prices:
1. Learn from competitors
No business operates in isolation, so be aware of the market price for your products. The first step when it comes to setting your prices is to analyse what your competitors are doing. Look at their pricing to help you build a benchmark for your own product pricing.
The trap that many small businesses fall into here is that they compare themselves to the wrong kind of competitor. They look at a big supermarket and see that they sell a t-shirt for £5, and wonder how they can compete with that price.
The simple answer? They can’t. But that’s OK. People have many reasons for buying from supermarkets, just like they have different reasons for buying from small businesses. Setting your prices as compared to competitors requires looking at people who share a similar business model to you.
Can you find three other businesses that sell similar products to you, produced in a similar way? If you hand-pour your soy wax candles, look for three other businesses that do the same. If your clothes are made from organic cotton in a small factory in Portugal, who else does that?
Once you have found the correct competitors to give you a comparison, however, you don’t have to match their prices exactly. You can have your own pricing and it can even be a point of differentiation between you and your competition.
If you haven’t checked your competitor’s pricing recently, it’s worth another look. Many people I have spoken to have found that they have been making assumptions about what the market price is for the products that they sell without updating their information. When they actually checked, their competitors had increased their prices. When prices are rising, it’s important to keep your competitor information updated.
2. Ask your customers
When was the last time that you sat down with your ideal customer to chat about their buying habits? The next step after reviewing your competitors’ prices is to make sure that you are cross referencing what your customers typically pay.
Ask people what they have bought in the past instead of asking them if they would pay a certain amount of money for an item, as people tend to be aspirational in their answers.
In other words, if you say “Would you pay £125 for this t-shirt?” they are most likely to answer “Yes”, but if you ask them “how much were the last 3 t-shirts you bought” and they say £20-25, then you have a better idea of the real prices they are prepared to pay.
Don’t forget to ask them about how much they paid last time they treated themselves or bought a gift for someone. Products from small businesses tend to be the kind of items that people might buy themselves or others as a gift, and those purchases tend to have a slightly higher price bracket, so it’s important to understand that dynamic too.
Remember though that a fact of life for small businesses is that there’s always someone who will think your products are overpriced. Be sure to build up a picture from your customer base, not just one isolated piece of feedback.
3. Avoid pricing pitfalls
Pay attention to psychological price points such as £10, £20, £50 or £100. For example, it is much better to price at £99 than £102. One is under £100, and one has gone over that psychological barrier.
Avoid “odd” and inconsistent prices. Try and streamline the number of different price points that you use. For example, having items at £12, £13 and £14. Can you just group them together at one price point?
The clearer and easier the price architecture is, the less confusion there will be in the mind of your customer.
The proof of the pudding is in the eating
Ultimately, your customer will dictate your pricing. You can spend many hours theorising over the best price points, but just set your prices and start selling. You can always adjust prices, although I suggest leaving 4-6 weeks before changing anything so that you have time to review your sales.
Are you selling very little? Don’t assume that this immediately means that your prices are too high, unless you know for a fact that you are considerably more expensive than your immediate competitors (eg those of a similar quality to you).
Could your prices actually be too low? Customers make assumptions about your product based on the price, so if you’ve set the bar too low, they might assume your quality is lacking.
On the flip side, if you are selling an item very quickly (faster than you can get it back into stock for example) then this is usually a sign that there is room to increase your prices.
Many established business owners would also benefit from a regular pricing review, at the very least once a year. This allows them to re-examine their costs, and look at where they have crept up over time, as well as check-in with what their competitors are doing.
Taking the time to look at your prices will be well worth the effort you put in.
This article is adapted from Catherine’s book – “Tame Your Tiger – how to stop your product business eating you alive.” You can grab a copy right here, or find out more about all of Catherine’s support and resources at www.resilientretailclub.com
Catherine Erdly is a small business and retail expert, and the founder of The Resilient Retail Club. She is a Forbes.com contributor on the subject of starting and scaling a product business, a judge of the Good Retail Awards, on the Editorial Board of Modern Retail, featured as an expert commenter on tv, newspapers and radio, and a frequent writer and speaker on the retail industry at various trade shows and industry-led events across the country.
She was also recently voted a top sales adviser in the UK by Enterprise Nation, and named one of the top 25 retail influencers in the UK. Catherine is passionate about how business can be a force for good, and was awarded the Charity Champion of the year by Work For Good.
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