Sage Advice UK

How to set your price: Pricing strategies and methods

Setting the right price for your products and services is key to gaining profits, so a well thought out pricing strategy is a valuable tool to ensure business success.

Setting a pricing strategy: key considerations for business owners

Price should never be considered alone – it’s just one element of your marketing mix.

You also need to consider:

Your pricing strategy should be based on:

What are the key methods and pricing strategies?

The key elements of pricing strategy for any business are:

The main pricing methods

Cost base pricing

For cost base pricing, you simply calculate the cost of your product or service and then add a percentage on top, which is your profit margin or mark up.

The formula for cost base pricing is:

Selling Price = (Fixed Cost per unit + Variable Cost per unit) + Desired Profit Margin (%)

This type of pricing is mostly used where all competitors provide the same goods/service and price is the only difference between them.

Although this pricing method is simple to calculate, it takes no account of demand or of customers’ willingness to buy products or services at that price.

Value-based pricing

Value-based pricing sets a price based on the perceived value of a product or service, rather than cost of supplying it.

This pricing strategy is typically used in businesses that produce things like medicines, computer software, or luxury and designer goods.

Generally value-based pricing allows for higher profits on each item or service sold, but there’s a risk that customers may not be prepared to pay and choose a lower priced competitor.

Target return pricing

The formula for target return pricing is based on the profit you want to achieve divided by the number of sales you expect.

So, for example, if you’ve invested £5,000 in some goods and you expect to sell 1,000 of them, you’ll need to price each item at £5 to break even. And if you price them at £10 each, and still sell 1,000 you’ll make a 50% profit.

This type of pricing is useful for businesses who can accurately predict sales before investing in production.

Going rate pricing

This strategy involves setting prices to match the competitor’s products, usually the market leaders’ prices. It’s common among businesses that offer the same products, such as supermarkets or other retailers.

Top pricing tips for business owners

When it comes to pricing, there are no set rules or best practice that you can follow to get it right. Setting the right price can be based on many different factors including the time of the year, customers’ willingness to pay, business targets and what your competitors are doing.

My best advice is… don’t rely on price alone to create miracles for your business. You must make sure products, place, promotion and price all work together.