22 Pricing 1: Setting your selling price

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PRICING 1: SETTING YOUR SELLING PRICE

A big part of how people see your brand is what price you set for what you sell. Their views are infl uenced by where your brand is positioned against your competitors price wise, whether you have year-round sales, do the occasional three-for-two offers, give discounts, or set a top price and never negotiate.

The idea You can base your pricing on a combination of these four things: Costs Customers Competition Corporate strategy Most importantly, you’ve got to cover your costs or you’ll go out of business.

There’s a pricing system called cost plus, which has been in operation since Victorian times, and which some companies today still use to set their prices. It’s a good basis to make sure that your costs are covered, but it’s not enough. These days companies generally look at what their customers are prepared to pay and what their competitors charge, and then infl uence prices according to what they’re intending to do with their company in future.

The cost plus pricing method basically involves adding up all the costs to get an annual total, then adding a percentage profi t on top to work out the selling price. For example, many department stores

fi rst total up the fi xed costs – such as rental, electricity, water, staff costs, maintenance fees – before adding 200% to the cost of each product they sell to get a selling price.

Using cost plus makes sure that you include all your costs, and add a mark-up to put you into profi t. After that, you have a certain amount of fl exibility. While customers are generally happy to get a bargain, it’s not true that if you lower the price they will buy more. There is a famous urban myth that at one London department store, if a product didn’t sell, their strategy was to double the price. If something costs more, up to a certain point customers will assume that it is better quality. So if quality is what they’re looking for, they will search out a higher price not a lower one.

People do feel loyal to brands that they trust, but will often be tempted away by something new, interesting and cheaper. If the new brand disappoints them, they’ll be back, so there’s no reason to be panicked into cutting your own prices, although you may decide on a tactical temporary discount.

An organisation planning to sell out and shut down will act very differently from one which intends to invest in new property, expand overseas or buy out its competitors. All these things infl uence your pricing.

And your prices infl uence your brand identity.

In practice • Calculate your costs, and unless you are running a temporary tactical campaign, make sure that your prices are going to cover all your expenses and give you suffi cient profi t to continue trading into the next year.

•Evaluate your brand position in terms of price, quality, value and other infl uences. Set a price that is consistent with your position in the market. • Do you want to change the way your customers see your brand? You can change your prices to make a brand statement, but be prepared to change them back.