Fazley Rabbi"If I raise my price, customers will go to the shop next door." Many owners, from online sellers and caterers to workshops, agencies and small manufacturers, set prices low out of fear. The business looks busy: orders come in, staff work late. But at the end of the month there is little left over, and the owner's own time is not paid at all.
Pricing does not have to be a guess. It rests on three things: your full costs, the value the customer gets, and what competitors charge.
Start with your real costs
Most underpricing begins with an incomplete cost sheet. List everything, per unit or per job:
- materials and packaging
- direct labour, including overtime
- your own time, valued at what you would have to pay someone else to do your job
- rent, electricity, generator fuel, internet and phone
- delivery, cash-on-delivery charges, and failed deliveries or returns
- fees charged by mobile payment or card services
- wastage, damage and unsold stock
- marketing and advertising
- equipment that wears out and will need replacing
Whether VAT or other taxes apply to your prices, and how to show them, is a question for your accountant; confirm it before you publish new prices.
This gives you a floor price: the price below which every sale loses money. Knowing it is the most useful pricing fact you can have.
Then look at the value to the customer
Customers do not pay for your costs; they pay for what they get. Ask yourself:
- What problem does this solve for them, and what does that problem cost them?
- What do they value besides price: reliability, speed, quality, after-sales service, trust, being able to call you directly?
- Which of your customers value those things most?
Business buyers often care more about reliable delivery and consistent quality than about the lowest price. Someone buying a gift may care more about presentation and trust than about a small saving.
Use competitors as a reference, not a rule
Check what competitors actually charge and what is included: delivery, warranty, quality of materials, service. A lower price elsewhere may come with less. Then decide where you want to sit: the cheapest, the middle, or a premium option with a clear reason. Being the cheapest is a hard position for a small business to hold, because a larger competitor can always go lower.
Setting and raising prices, step by step
- Calculate your floor price for your main products or services.
- Write down what makes you different, in a sentence or two your customers would agree with.
- Map competitor prices and what each includes.
- Choose a price above the floor that matches your position.
- Test before changing everything. Apply new prices first to new customers, a new product or a new package.
- Offer options. A basic, standard and premium version lets price-sensitive customers stay while others choose more.
- Explain increases plainly to existing customers, with notice, especially business buyers on regular orders.
- Watch orders and enquiries for a few weeks, and adjust.
Common pricing mistakes
- Matching the cheapest competitor without knowing their costs.
- Giving discounts by habit, until the discounted price becomes the real price.
- Leaving your own salary out of the calculation.
- Raising prices for everyone overnight without explanation.
- Never reviewing prices while costs keep rising.
Where outside help is useful
You know your costs and customers. An outside view can help you build the cost sheet properly, look at competitors with fresh eyes, and design packages and a position that does not depend on being cheapest. See business development strategy and positioning beyond price.
A small first step
This week, take your best-selling product or service and work out its full cost. If the floor price surprises you, that is your starting point. Get in touch if you would like help with it.