How to price your product or service

It is baffling. Why would one web designer charge you Sh15,000 and another a whopping Sh80,000? Why the discrepancy? Welcome to the free market! Some industries have standard rates, but in Kenya, in most industries, especially the creative service industry, nothing is cast on stone.

So where does that leave you as an entrepreneur? Should you be cheap to ensure you get volumes of work, or should you charge what you feel is worth your time? And what determines how you price your product or service? Here are eight factors to consider. A little

heads-up, there is some simple math required, but don’t sweat it, it’s not calculus. 

1. Know your customer

This is something that you should research on from the onset. There is no need targeting low spenders with an expensive product or service. They will never buy. The reverse is also true. If you have money to do so, hire a research company to help you analyse your client demography. You need to know them in and out, what they buy, where they buy, are they all about saving cash, or are they flashy spenders, where do they live, or do for fun. You need this to know how much they are likely to spend for your product or service.  

2. Know your costs

How much does it cost you to make a single item or to offer a given service? Factor in every single cost, airtime, internet, rent, labour costs, man hours, cost of marketing and selling your product be it social media or door-to-door, your projected salary as the business owner, costs associated with borrowing or investment from shareholders. Factor in all those costs and tabulate them. 

Once you know your costs, tabulate how much of a markup in profit you would like to make. For example, to make a single website costs Sh20,000 – buying and configuring template, domain name, hosting, and an extra Sh20,000 for other labour services such as copywriting, and photography gives you Sh40,000 in actual costs. If you want to make a Sh10,000 profit on every website, your charge to clients becomes Sh50, 000. 

3. Know your revenue target

You need to figure out your annual revenue target. That means you need to make an estimate of how much of a product or service you will offer in a given time period, say a year. Once you have that figure, then you apply some simple math. Here is an example once again using the website example. Let’s say you estimate that you will develop 24 websites a year (two a month) and you want to make Sh1 million that year.

That becomes 1,000,000/24 = approximately 42,000.

That means that you should charge Sh42, 000 per website. If your production costs are Sh40, 000, that means you only make Sh2,000 profit per website. This simple math shows you where you might be getting it wrong and underpricing your product or service. This helps you adjust your pricing accordingly, which contributes to how much money you will earn in a year. 

4. Pay attention to the Market trends

Using the website example, you need to find out what is going on in the market. Is it simply images plastered on a site with simple wording Or is there a wider adoption of video, social media integration and more interactive user interfaces for websites? Also pay attention to taxation and labour laws. For instance, are you going to have to hire, increase salaries, or is there gravitation to something other than websites for businesses online? You need to pay attention to all of this. If your service or product is either obsolete or there are price reductions in the market, that affects your pricing as well. 

5. Who is your competition?

You can’t saunter into business assuming competitive pricing doesn’t affect you. It does, and with the kind of economy we have, consumers are pocket pinching. You need to find out why people buy from your competition and also what makes your competition pricing model higher, or lower than yours. This information can be found by simply guest shopping at your competitors, published information and phone calls. This is where business gets cut throat because, bottom line, you are in business for healthy profit. You need to stay competitive with your pricing and your delivery. 

6. Scrutinise your pricing

This is best done monthly. Remember, you need to check your monthly profitability against your annual revenue target. And this is best done by analysing profit from every sale. Each sale must make the targeted profit to ensure you make the annual revenue you need to stay profitable as a company. 

7. Listen to your customers

These customers that you are listening to ideally should be the right ones that you targeted. This is a great way for your customers to feel valued. Find out from them what they feel about your pricing as you also pay attention to what your competitors charge. Consider what they say as you look at your own accounts and make adjustments where necessary, sometimes the adjustment isn’t necessarily in cost, it could be in a promotional product or even after sales service. 

8. Know when and how to lower or increase prices

Lowering prices is a great strategy to capture market share. This could be to encourage people to try your product or if you are trying to stay competitive, or if industry rates have dropped. In terms of price increase, the truth is, it is normal for businesses.

If you never increase your prices as a business, the likelihood of staying in business is also very slim. Price increases are best justified when you are offering a new service or bonus item. The best way to review the viability of a price increase is to watch the sales of your product or service after adjustment.

If people keep buying, that’s a great sign.