Simple Pricing principles

Being able to set the price points of your goods/services can be daunting. Here are a few principles that can serve as a guideline in pricing the value of your goods/services -

Put together your costs

Break down your costs into direct and indirect costs. Your direct costs are the costs that have to be incurred before you can have your product/service for sale while your indirect costs are the costs that are not your direct costs eg, rent. For example a direct cost for a fashion business will be cost of fabrics including threads, buttons etc., labour paid to tailors, transportation to the market to purchase fabrics etc. while direct costs for a service business will include salaries of the people directly involved with the service rendered, transportation costs incurred when rendering the service etc. The total of the direct costs are our major concern with pricing as businesses can always work on their indirect costs.

Identify your target market

You need to draft out your customer archetype and understand their spending power, how much they earn on an average and are willing to spend. For example, a typical customer will prioritize their basic needs over a luxury splurge.

Calculate your intended profit

The difference between your intended sales price and your direct costs is your gross profit and the difference between your gross profit and your indirect costs is your net profit. As a business owner, you need to determine your comfortable/convenient amount of profit and work out a strategy that will help you achieve it.

Determine your pricing strategy

After considering the above and you have an idea of what your price should be then you have to determine what strategy to adopt. For example -

a) Price Skimming – here, you price at a relatively high amount to cream off the highest level of profits even though this restricts the number of people that can afford the product.

b) Price Penetration – a low price is charged to persuade as many people as possible to buy the product at its early stages even at the expense of making profits in its early years.

c) Pricing at a premium – prices are set at an amount higher than their competitors. Here the prices give the customers a feel of buying a unique product. The business owner will have to work on creating the right value perception.

d) Economy pricing – costs such as marketing are reduced to nil in other to keep product prices down to attract a specific segment of the market that is price sensitive. An example of a company that uses this approach is Shoprite, Wal-Mart.

There are other factors that come into play like the industry, location and the economy. However, this simple rule of thumb will help form the basis of your pricing model.

Tejumade is a highly motivated Statistician who is currently studying to become a Chartered Accountant from the Association of Chartered Certified Accountants (ACCA).

She is the founder of The Tejumade Girl - A platform that helps young women focus on building their future, ditch distractions or limitations and wear their crowns. She is very passionate about SME’s and has a wealth of experience in the fashion industry where she has used her analytical and finance skills to help businesses. She is very passionate about the youth and believes she has a mandate to help them become the best of themselves and discover that they are the future of Nigeria.

Tejumade is an integral part of the Big Startup team and is training to become a certified business coach. She is an enthusiastic go-getter, enjoys having educative conversation and derives pleasure in creating things.