How to Setup a Price? A Step-by-Step Guide

The more you can differentiate your products or services from others the wider range of possible prices you may be able to charge as the customer has little to compare what you are offering against. Let’s dive into how to setup a price? for your products or services, so that you can attract potential customers.

If you can differentiate what you are offering, a higher price may work better. People automatically value high-priced items more than low-priced items and some people just wouldn’t buy a low-priced item on the belief it is also low quality.

The perceived value to the customer must be greater than the price or they won’t buy.

Your price will not ultimately be determined by you but by what your prospects are prepared to pay. You can only find this out by testing different prices.

You will always have a minimum price below which doesn’t make sense to sell your product or service. You’ve got your overheads to cover and the minimum amount you need to earn to cover your living costs.

To test for the optimum price you need to test some price points. If you can differentiate what you do, look at raising prices by 25% or 50%. If you can’t differentiate what you sell from your competitors, small increases are likely to be more relevant.

Then record the results. You also need to test to see if price decreases make you more profit.

It has been proven in studies that the price-sensitive points work such as £99 rather than £100, although it has also been shown more recently that many people now read £99 as £100 and that you need to change a 9 to a 7 with many people for it to have an impact.

Make sure you measure the impact of price movements on profit and not on sales levels.

Let’s look at an example for a company selling widgets…

Sales (1000 widgets at £100 each)100,000

Cost of sales (1000 widgets at £70 each)-70,000

Gross Profit30,000

Fixed overheads-25,000

Profit 5,000

The company wants to know if it’s going to be better off by reducing prices by 10% or increasing them by 10%. The only way to find out is to test. After testing, they find out…

Option 1 of reducing prices by 10% results in a 20% increase in quantity sold, and

Option 2 of increasing prices by 10% results in a 20% fall in quantity sold.

What should they do?

It’s tempting to go for option 1 with 20% more sales with only a price cut of 10% but let’s look at what happens…

Option 1

Sales (1200 widgets at £90 each) 108,000

Cost of sales (1200 widgets at £70 each) -84,000

Gross Profit 24,000

Fixed overheads -25,000

Profit -1,000

Option 2

Sales (800 widgets at £110 each) 88,000

Cost of sales (800 widgets at £70 each) -56,000

Gross Profit 32,000

Fixed overheads -25,000

Profit 7,000

Raising prices is better. In addition, you have less work to do for more money.

Every situation will vary depending on your profit margins, which is why it’s important to do the numbers. However, using discount pricing will generally mean you do have to significantly increase sales volumes to make more profit.

The following chart gives you an idea of the effect on your profitability by showing the quantity your sales would need to increase or decrease if you reduced or increased your prices. You can use this table as a guide to your pricing policy.

If your present
gross profit percentage is:
20% 25% 30% 35% 40% 45% 50% 55% 60%
And your prices fall by To increase profit, sales volume must increase by more than…
2% 11% 9% 7% 6% 5% 5% 4% 4% 3%
4% 25% 19% 15% 13% 11% 10% 9% 8% 7%
6% 43% 32% 25% 21% 18% 15% 14% 12% 11%
8% 67% 47% 36% 30% 25% 22% 19% 17% 15%
10% 100% 67% 50% 40% 33% 29% 25% 22% 20%
12% 150% 92% 67% 52% 43% 36% 32% 28% 25%
14% 233% 127% 88% 67% 54% 45% 39% 34% 30%
16% 400% 178% 114% 84% 67% 55% 47% 41% 36%
18% 900% 257% 150% 106% 82% 67% 56% 49% 43%
20% 400% 200% 133% 100% 80% 67% 57% 50%
25% 500% 250% 167% 125% 100% 83% 71%
If your present
gross profit percentage is:
20% 25% 30% 35% 40% 45% 50% 55% 60%
And your prices rise by To increase profit, sales volume must not be reduced by more than…
2% 9% 7% 6% 5% 5% 4% 4% 4% 3%
4% 17% 14% 12% 10% 9% 8% 7% 7% 6%
6% 23% 19% 17% 15% 13% 12% 11% 10% 9%
8% 29% 24% 21% 19% 17% 15% 14% 13% 12%
10% 33% 19% 25% 22% 20% 18% 17% 15% 14%
12% 38% 32% 29% 26% 23% 21% 19% 18% 17%
14% 41% 36% 32% 29% 26% 24% 22% 20% 19%
16% 44% 39% 35% 31% 29% 26% 24% 23% 21%
18% 47% 42% 38% 34% 31% 29% 26% 25% 23%
20% 50% 44% 40% 36% 33% 31% 29% 27% 25%
25% 56% 50% 45% 42% 38% 36% 33% 31% 29%

The ONLY way to find the best price is to TEST.

Are you looking for professional tech-savvy tax advisors and accountants in the UK to guide you? Contact us now!

How We Can Help You

At Accotax, Cheam Accountants, We can advise on price points to test and on the measurement of the results.

Last Words

In conclusion, how to setup a price is a crucial step in ensuring your business thrives. By understanding your costs, researching the market, and considering your target audience, you can create a pricing strategy that attracts customers while keeping your profits healthy.

Remember, it’s not just about covering your expenses but also about delivering value to your customers. With the right approach, you’ll be well on your way to establishing prices that work for both your business and your clients.

So take the time to analyze and adjust your pricing as needed—your business’s success depends on it!

We hope you got the answer of how to setup a price and you are ready to create attractive pricing models for your business.

Disclaimer: All the information provided in this article on How to Setup a Price? including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.

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