Problem Solver: How do I decide what price to charge customers for my product?
Question: I am planning to start up a business selling a garden tool product. I am not so sure about how to set the price that I charge shops, etc.
Answer: This is a very important question and one very often that early-stage businesses neglect to answer. There are two key elements in setting the price: you need to be sure you can make a profit and you need to make sure that ultimately the consumer will pay the price on the shelf.
To answer this, you need to work both forwards and backwards. By this, I mean start by going into retailers who sell similar products and do a price survey of every possible product in the market that is the same as or similar to yours. Put all of these prices on to a spread sheet and that will give you a good overview of the top and bottom price levels within your category. It is usually possible to get an idea of the retailer margin expectation and it is then a rather simple matter to work these prices back to what the producer would be paid, so that will give you one indicator.
In parallel to this, you need also to work from the bottom up. Ensure that you have allowed for all of the costs, packaging and distribution. Critically make sure that you allow some budget for promotional activity. There will of course be many other costs you need to think about like servicing a bank loan and, of course, making a profit. On top of this figure, you then add your retailer margin and that will give you another option for price.
Then you will have to take into account how different your product is from anything else in the market.
The key question, after you have all your calculations done, will always be "what will the consumer actually pay for this?".
This is a complex area and my best advice would be to go to your local Enterprise Board and request a session with one of their financial advisers who will help you with this.
Do you have a problem with your small business? Email Feargal at email@example.com