How to Price Your Products and Services: A Small Business Pricing Strategy

How do I price my services/Products?

This is something you have got to do in the early days of your business, yet there is no guidance or a method shared with business owners. 

The price you charge can determine whether you get clients, whether you break even and whether you can run your business sustainably.

The thing is you do not have to charge a high price to make abundant profits. It is a misconception that a to earn a lot you need to charge more. 

Well, then how do you make a profit while being fair to your customers and ultimately growing your business sustainably?

There are different methods of pricing. In this article, I am going to discuss three methods in a series of articles.

In this one, we shall look at - Cost plus method

The basic principle of pricing is that you need to recover the costs of delivering the product/service and of running your business. 

The first step:

Identify the capacity of your business ie. How many products can you deliver/clients can you cater to in a month?

If you haven’t calculated the capacity of your business, head to this article to get started - https://www.milliongoals.co.uk/post/how-to-calculate-your-business-capacity-and-why-every-small-business-should

The second step:

List all the direct costs of your business.

Direct costs are those spent directly to prepare the final product/service. Without these costs, you cannot deliver your product or service.

Direct costs are usually arrived at per unit of your final product/service. 

Keep this number as is.

The third step:

You will now have to list down all the indirect costs of your business.

Indirect costs are those spent on operating your business. It can be electricity, subscriptions, marketing, salary etc.

Total up the costs spent for a for a month.

Before moving on to the next step, it is important to be wary of the costs you add up here which will be absorbed by your price. 

Some costs that should NOT be absorbed are asset purchases and repair expenses, one off event registrations, one off event travel tickets, office décor and electronics, personal expenses, self development courses, office repairs, Income tax, one off promotional expenses, interest.

Indirect expenses to be considered for pricing are only those that are necessary to run your business – operating expenses. 

The fourth step:

Arrive at indirect costs per unit - divide the above figure by the output, at the determined capacity of your business.

Why does capacity matter so much?

You do not want to arbitrarily set a selling price which does not cover your costs – the result? You will be busy and making sales but, never make profits!

Start with output that your business has the capacity to provide - you then ensure that the total costs are appropriately absorbed in your selling price.

• You reduce risks

• You are guaranteed a profit, if you sell at capacity

• You know how much you need to promote for

• You know when you can break even

  
  

The final step:

You now have the total cost per unit of your product/service.

The final step is to add a profit margin. The margin reflects your efforts, your brand value and your goodwill.

It is essential to consider the value added in your product/services and the competition in your industry. This will be covered in the upcoming articles.

If you are ready to understand business finances better and have a coach beside you to help you make those initial big decisions in your business, book a call today – https://calendly.com/founder-gh46/milliongoals

Written by

Mrudula Muralidharan

Founder and Finance Coach

Million Goals