In the second of our series from retail consultant Catherine Erdly of Future Retail, we examine one of the most crucial decisions in your business – Pricing…
I’m in a conference room surrounded by piles of notebooks. Rows of them, in fact over 500 different types all labelled with their price and arranged from lowest to highest. This might seem like some kind of weird dream, but in fact, this was me in my previous career, trying to make sure that every notebook in a national stationery chain was priced correctly.
It’s the most important decision in your business
Pricing your products is one of the most important decisions you can make in your business – and something that larger retailers spend hours perfecting.
Too low, and you simply cannot build a sustainable business. Too high, and you won’t sell at all.
But it’s not easy
It’s also one of the topics that comes up frequently with my clients – small product-based businesses who sell beautiful products.
They struggle with factoring in all the elements of a pricing strategy, and with finding a fair price for their goods that doesn’t sell themselves short or turn off customers.
Or they get their pricing strategy clear on paper, but then a little voice in their head (or a single remark from a customer) makes them doubt themselves.
These four questions can help you
Question 1 – How does your pricing compare to your competitors?
Your trusty winter coat has fallen apart and it’s time to buy a new one. You will have your favourite places to look for a new coat – whether that’s the vintage shop round the corner or Boden. You’ll have an idea of the kind of coat you want – but of course you’ll have a budget and so price is an important consideration.
No business operates in isolation, so be aware of the market price for your products. That means taking a look at what your nearest competitors offer, and putting yourself in your customer’s shoes.
You want to understand your customer’s choices – but that doesn’t mean that you have to match your competitors prices. If your product is worth more, then charge more, but make sure you are telling your customer what makes it superior.
And don’t feel that you have to compare yourself to everyone – including the mass-produced versions of your product. You simply won’t be able to compete with these on price, so instead focus on sharing your wonderful story, materials and quality with your customer.
Question 2 – Are you selling?
Ultimately, any work that you do on your pricing is all theory until you actually see 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 (e.g. those of a similar quality to you).
Ask yourself instead if you are doing enough to communicate your quality and value to your customers.
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.
Question 3 – What are your customers saying?
Let’s start with a fact of life for small businesses. Someone will always think that you are overpriced.
It’s very important that you don’t let isolated comments cause you to have a knee-jerk reaction and drop all your prices. Accept that these people many not be your ideal customer and move on.
In an ideal world, you would hear very little from your customers about pricing. If you are consistently hearing feedback from people who are genuinely your target customer that your prices are too high, then you need to take action.
On the other hand, if the majority of people are surprised at how reasonable you are, that’s a good indication that your prices are too low and you should be looking to increase them.
Question 4 – Are you making any money?
I’m a firm believer that you need to set your prices by looking at what is right for your market and your customer, rather than taking your cost price and multiplying it by a factor which could result in your retail prices being unrealistic.
However, in order for your business to thrive, once you have set your prices, the next step has to be to calculate your profit margin.
The profit margin is the % of the selling price that is profit. So if you sell a £10 product that is £7 profit, your profit margin is 70% (assuming that you are not VAT registered).
You have to factor in all costs that are associated with producing your product, including your hourly rate if you make the product yourself.
As a rule of thumb, your profit margin should be at least 50% if you are selling directly and 70% if you want to sell at wholesale.
It’s part art and part science
Pricing your products is part art and part science – which although it is true, can be a frustratingly vague idea to grasp when you are first starting out! Ultimately, what it means is that you may have to try a few different prices before you find the sweet spot where you are maximising your profit and keeping your ideal customers happy.