“I want a spreadsheet with all the cost prices so I can put a formula in to calculate the retail price”
Sounds like it would make pricing much easier, doesn’t it?
Back when I was known as “mistress of the dark art of menu engineering”, one of the marketing managers came to me and asked for all the costs so they could set a formula to do markup pricing.
My answer was no. We’re not doing this by a formula. One simple reason:
Mushrooms, with blue cheese, on toasted ciabatta. Not the best description, I know, I can’t remember exactly how it was worded. But what I do know is that it was one of our best selling dishes. It was also one of the cheapest to produce.
If we’d used a formula, we would have lost hundreds of thousands of pounds, or priced our other products way too high for the market.
When you think about setting the retail price, you have to consider what the customer is prepared to pay, not just focus on how much it costs to produce.
Pricing your offers, especially when they’re services, can be hard.
There is no one way, no exact formula that will give you the answer because setting the price is part science and part art.
The science bit is the easy part!
- How much does it cost?
- How much profit do you want or need to make?
- How much time does it take to perform the service?
- What do our competitors charge for the same or similar products and services?
- How much money or time do you save your customers and clients?
These are all quantifiable. Numbers that can be divided, added up, multiplied or subtracted to give you that most comforting thing. A firm number, that you can hang your hat on.
The hard bit, though, is arguably the most important.
And that’s the art.
What are your customers or clients prepared to pay? Or in other words, how much do they value your product or service?
The technical term for this is Value Based Pricing.
So, how do you actually start setting your prices?
I would always start with the numbers, because these give you some concrete guidelines. You have to price your products or services so they make a profit!
Understand your numbers
What does your product or service cost to serve?
What revenue do you need or want to make?
How many do you need to sell to reach your profit goals
Understand your customers
What is the value of your product or service to them?
Can you quantify what your product or service does for them by saving money or time?
Understand where you sit in the market
What do you competitors charge for a similar product or service
What differences are there between what you sell and what they sell
And then finally, what does your gut tell you?
Much underrated, gut feel is about knowing your customers, putting yourself in their shoes and asking yourself…..
What would you pay for your service or product?
It all sounds like a lot of work. And it can be. But a really simple exercise for getting to the number is to ask yourself a few key questions:
- What’s your gut feel for how much this is worth? What would you pay for it?
- What’s your revenue target?
- How many of these do you need to sell each month to meet your revenue goals?
- Do you think this is how many you can sell each month?
- If not, how many do you think you can sell?
- Divide that by the revenue goal.
- That’s how much you would need to sell this for.
- How does that feel?
