It is never easy to price a product because often people think it’s like a hit and miss exercise! The fact is there are ways you can hone your pricing by understanding and research some simple things.
Firstly, I mentioned before that on occasion government departments will disclose how much they have paid under a contract or panel before. For example, a catering company in the Australian capital of Canberra was paid $833,616 over 20 contracts which mean’s the average value of a contract was $43,325.80 (not bad for lunch for a training course!).
Now you can make some further analysis which means if you were a competitor you may be able to understand:
What the average spend for a contract is and therefore;
What your competitor charged which can lead to how much you could charge, be competitive, secure the contract and make a profit.
The other key is that many government departments have pre-set budgets on what they can spend across the forward calendar year. Often they will publish a ball park figure of allocated spending on certain line items that are very much product categories.
For example, you often know as a recruitment company how much the department is able to spend on contract labour over the year which means you can strategically estimate how much of that you could secure.
So getting the price right is firstly understanding how much the government department and agency can spend or has budgeted, what you can then do to provide a service and product at a price point that allows you to make a reasonable margin and therefore a profit.
It doesn't matter if you are building a business around a product or service you need to make sure you get your price right. Go low and you run the risk of losing money while aim high and you might out-price yourself.
Take for example a consultant – how do you know that you have the hourly rate right or in the food production business are you sure people will pay a premium for your caviar topped cheese slice?
The only way you really know is by market testing the price point. Take some time to research what others are charging for the same or similar product and service. If you can, use friends and family as a road test. Just remember don’t launch unless you have the price point as close to perfect as you can get it. Get it wrong and you’ll need to be prepared to pull it back as soon as you can.
Wherever possible make sure you come as close to the price the market is prepared to pay as you can.
In doing so understand that while you may think your product or service can attract a premium price or high margin, the market may determine otherwise.
This is where you also need to be practical and ensure before you publish your price that you know the true cost of putting it to market. Factor in your business costs and overheads as well as your own labour costs.
Once you have determined the cost (also known as the cost of sale) you can then set about determining the margin or the profit point. We sometimes refer to this as being mark-up. As a rule your margin should be a minimum of 30%.
The test of the price point will come when you take your market price and assess it against the cost of sale of competing products or services. If they are selling higher than your all inclusive cost then you may decide to move the margin up – although, you could also decide that a lower price could be a good customer acquisition strategy.
If their cost is lower, then you may consider lowering your margin to match.
In doing so never ever convince yourself that by under-pricing your product it will somehow generate business and based on volume you are likely to make a profit.
Remember you never went into business as a charity and be careful that a strategy such as that doesn't have the reverse impact of then setting the customer expectation of that being the market price.
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