How to benchmark your pricing effectively.

Pricing your products and services often feels like an art form, balancing the value of your hard work against what your customers are willing to pay, all while keeping an eye on the competition.

We’re here to demystify the process, offering a clear roadmap to help you benchmark your pricing effectively.

Let’s jump in.

Understanding your value

Before diving into the numbers, take a moment to reflect on what you bring to the table. What unique benefits do your services or products offer?

How do they enhance your customers’ lives or businesses? Recognising your value is the first step in setting a price that reflects the quality and distinctiveness of your work.

Remember, it’s not just about covering costs – it’s about charging for the real value you provide.

This is useful for setting the tone of the price benchmarking process so you don’t consider figures in isolation of more intangible value.

Analysing your costs

After reviewing your value proposition and what you bring to the table, and before checking competitors and the market, you’ll need to understand your costs.

Ensure you have a detailed breakdown of what it takes to deliver your service or product, including direct costs like materials and labour and indirect costs such as overheads and marketing.

Here’s how to do it:

Step 1: Identify all your costs

First, you’ll need your direct costs – expenses directly into creating your product or service. For each product or service you offer, list the following:

  • Materials: The raw ingredients or parts needed. For example, if you’re a web designer, this might include software subscriptions. Or, for homemade candles, this would be wax, wicks, and scents, etc.
  • Labour: The cost of the time spent creating each product or service. Determine an hourly rate for yourself or your employees and multiply it by the time spent on each item or service.

Example: A graphic designer spends 5 hours designing a logo. If their hourly rate is £50, the direct labour cost is £250.

Indirect costs (Overheads)

These costs support your business as a whole and aren’t tied to a specific product or service:

  • Rent and utilities: Monthly expenses for your workspace.
  • Marketing and advertising: General brand promotion costs.
  • Salaries: Pay for employees not directly involved in production, like admin staff.
  • Equipment and supplies: Costs for computers, software, and other tools used across various projects.

Step 2: Calculate total direct costs

Add up all the direct costs of producing each specific product or service. This gives you the cost of goods sold (COGS) for each.

Step 3: Allocate indirect costs

Divide your total indirect costs by the number of products or services you produce or provide in a given period to determine how much overhead should be allocated to each.

Example: If your monthly overheads are £2,000 and you produce 200 items, allocate £10 of indirect costs per item.

Step 4: Determine your total cost

Add direct costs to the allocated indirect costs for each product or service. This figure represents the total cost of producing each item or service.

Step 5: Pricing for profit

Decide on your desired profit margin, which is typically a percentage of the total cost. Add this to your total cost to set your selling price.

Example: If the total cost for a service is £300 and you want a 50% profit margin, your selling price would be £450 (£300 cost + £150 profit).

Researching the market

With your costs in hand, it’s time to launch market research. Start by identifying your direct competitors and similar offerings in the market.

What are their price points? What do their customers say about the value they receive?

This will give you a benchmark to compare against, but remember, it’s not just about matching prices. It’s about understanding the market landscape to inform your pricing strategy.

Testing and feedback

Pricing should never be set in stone. It’s a dynamic element of your business that should evolve in response to market changes, customer feedback, and your own growth.

Consider implementing A/B testing with different pricing tiers or offering introductory rates for new services.

Monitor customer responses, sales data, and overall satisfaction to gauge the effectiveness of your pricing strategy.

An iterative approach allows you to refine your prices over time, ensuring they remain competitive and aligned with your value proposition.

Communication is key

Communicating your pricing can be just as important as the numbers themselves.

Be transparent about what your prices include and the value customers can expect. If your prices are higher than the average, be prepared to articulate why.

What extra benefits or superior results do your customers receive?

Clear, confident communication about your pricing reinforces your value and builds trust with your audience.

Summing up

Setting the right price is a blend of art and science, requiring a deep understanding of your value, market dynamics, and customer expectations.

By following these practical steps, you can benchmark your pricing effectively, ensuring it reflects the true worth of your work while remaining attractive to your target audience.

Remember, effective pricing is not just about what you need – it’s about what your work is worth in the eyes of your customers, who matter most.

If you’re looking for more advice or want to dive deeper into your pricing to optimise your business, contact Spark Accountants. We’ll help you analyse your figures and benchmark prices so you can boost your revenue and profits.

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