How to Set a Price for your Product or Service

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Alsu Ekinadose Odemwingie asked why the hardest thing that business people find hard to do is in setting a price. The Afripreneur group members were able to debate on this business killing issue as well as

provide fantastic solutions which some of them have been using to ensure their businesses make a profit. Here is what was discussed;

Morakinyo Mo Beckley
Actually Alsu, I've actually found out that they're not as such afraid to set a price but to set a price that will give them a worthwhile margin. You'll be surprised how many people in business hardly break even due to this oversight.
May 7 at 4:40pm

Segun Ogunlana
@Alsu; Asides from the greed of capitalism, its somehow hard, complicated and a bit time consuming depending on the nature of product or service in question. Most of us are gate-crashers into entrepreneurship without some requisite skills to execute some key parts of businesses which Afripreneur is seriously taking a look at. Most people arrive at prices by employing a pricing strategy of either using their competitors price or just using the cost of purchase + 5% or 10% mark-up. A pricing strategy i use is to calculate the cost of resources + mark-up + cost of getting a customer (Customer Acquisition cost) + resellers margin (if i will be using resellers) + profit margin. This is how i do arrive at mine and push it. In as much as people want a price cut on everything, they don't want to sacrifice quality of product/service. service and price should go hand in hand and we should have this at the back of our minds when setting prices. Cheers!!!!
May 8 at 6:24am

Suleman Abdullahi
The number 1 rule of business is SELL IT FOR MORE MORE THAN IT COST YOU. Unfortunately, the tricky part is calculating your true cost per item or service that you offer. Even seemingly established businesses have issues knowing the actual cost of doing what they do.

Segun did a good breakdown of some of those cost. It varies and whatever you do, you need to pin down exactly how much each product is costing you to get to the customers and support services thereafter, if you wish to remain in business for any significant amount of time.

After knowing you cost, you also need to have a good idea of the perceived value of your offering and set your price according to give you a good profit margin. One should be careful when setting prices though, even if the perceived value is high. You do't want to give room for competitors to advantage of, so do be fair.
May 8 at 9:20am

Alsu Ekinadose Odemwingie
I was thinking in the line of creating cash flow rather than setting a price that fluctuates! But thinking in terms of what one calls taxation!

Given that I see a business as a mini government in a specific sector, rather than being in the business of managing people we manage technical angles! In line with this I say the following and please poke on it or add so I can clarify.

Tax! When I read the definition of tax I relate it to cash flow! Government makes good cashflow! Tax means to me laying a charge for my services! Cash flow is evidence of Return on investment. The lower your price the more returns depending on your market buying power and developed interest!

There is a clear difference to me in setting a price and a strategy of pricing could be the method of taxing! Cash is king they say and kings tax, we are all paying homage to the 4 fathers! There is no way a business can make their cash flow work if they set a price based on their invested time and cost, no market can pay you for the cost of development, but over the years one can make a return on the investmen.

A price is a spread mark % on a market share! So if I invested 10000 my price tag should be 5-10% depending on my market demand!

Would I be wrong?
May 8 at 10:10am

Alsu Ekinadose Odemwingie
I am thinking from the angle of the developer not reseller!
May 8 at 10:13am

Lys Benson becouse the economical condition price isn't fixed also becouse of the consumption of such goods and how many people sells the commodities in an area also matters a lot
May 8 at 11:01am

Segun Ogunlana
@Olabamiji; I don't understand your fixed or mixed or free pricing system terms. If its what I'm thinking, then the free pricing system will have to be the major weapon for a start-up to gather data and stabilize. I guess the fixed/mixed pricing system you talk about is what obtains from d products like the FMCG items we purchase in the market.
Just thinking out loud. Cheers!!!!!!
May 8 at 11:34am

Suleman Abdullahi
@Alsu, if you invested 10,000 and your price tag is 5-10% depending on the demand might be good. But consider this...

- what is an acceptable income for you (and other that you might have to pay) i.e. how much would you want to earn as salary?
- what percentage does the government charge as tax?
- what is your actual running cost for developing and getting the product to market, including cost of raw materials, transportation, overheads such as energy generation etc?,
- Is there any cost associated with after sales e.g. returns of damaged goods?
- what is an acceptable profit margin to you after all said and done?
- How many units do you need to sell to covers all expenses and make a profit in a month, year etc?
This will help you determine when a break even might occur.

If after all said and done, a 5-10% mark up does it for you, then its all good. If not, the price needs to be reviewed.

If from the get go the pricing is wrong, it doesn't matter how many units you will ever sell, you will never break even or show a profit. You will grow and show revenue, yes. But your cost will always be above your revenue. It's only a matter of time before your loses and dept put you out of business.
May 8 at 12:46pm

Alsu Ekinadose Odemwingie
it aint about the Benjamin's for me, its all about the service, if my service has a process and that does the trickles. the banks look at your turn over they not interested in your profit somewhat. however investors also consider your profit.

the government can only tax me based on my income ie percentage of what i earn, even if it is 40% they cant take it all.

my running cost depends on my creativity level, i know how to make something out of nothing, no one owns my mind. product may have a fixed cost, services depends on time and my energy drive can put it to minimal.

i cut my needs to my size, your values determine your expenditures, partnering "negotiation tactics" reduces cost.

am i out of focus?
May 8 at 1:03pm

Morakinyo Mo Beckley
For me, its about the Benjamins inclusive. Am I doing role-play? No.
May 8 at 1:23pm

Alsu Ekinadose Odemwingie
for me money dont trigger drive, if i focus on money i will go blind and disillusioned.
May 8 at 1:27pm

Morakinyo Mo Beckley
No, the focus is not money, but yes, it is part of why I'm pursuing the dream. My business is to make me wealthy as well once I take care of the business as opposed to running after the money.

I keep my eyes on the numbers always.
May 8 at 1:28pm

Suleman Abdullahi
Alsu, nice ways of cutting down on cost but the truth is there is always a cost.

If you are running a service that only requires intellectual property, you still need to consider how much you need to be paid as salary. If you were working for someone else, you will definitely be paid a salary right? So, also, working for yourself, you will also need to pay yourself a salary.

You also need to consider the cost of transportation to whereever you conduct business, the cost of printing and some similar cost like that. You are in business to make a profit right or are you deciding to run a charity?

If you are in it to make a profit then, you need to factor all these in coming up with your prices.

Yes, the bank might loan you money based on your revenue and yes, you will pay back with interest, which in itself is another cost. Eventually, all the cost and dept will catch you with you and put you out of business or even in jail, if you did not do your pricing well.

Let consider an example of someone that decide to take simple web design as a business based on his knowledge of simple programming and graphic design.

If he were working for someone else, he might earn say N80,000 monthly. Working for himself and wanting to start lean, he might say he could survive on a salary of N60,000 monthly. He will require at least N10,000 within the month for transportation expenses, N8,000 for internet, N5,000 gen expense and an extra N10,000 miscellaneous expenses.

The sub total for these expenses is N93,000 roughly, he then rounds it up to N95,000. He calculates tax as say 40% of profit and want to make a profit of N10,000 monthly starting. Doing the maths, he needs to make N110,000 monthly to reach this target.

Averagely, he designs a site within 3 days and doesn't work on weekends. It means he works 21 days and will finish 7 sites within that period. Doing the maths, N110,000 divided by 7 will be N15,714. He can decide to conveniently sell his services at N20,000 and could offer a little discount to clients that insist and will be very fine. If he decides to sell his services at N10,000, then he is in trouble based on what he hopes to achieve. It doesn't matter if he made 100 sites, he will be running at a lost and eventually it will catch up with him.
May 8 at 1:34pm

Morakinyo Mo Beckley
Suleman, great analysis though the calculation in your last paragraph doesn't add up per doing 100 sites. Remember that some costs are variable, while others are fixed. The more revenue you pull in monthly, your fixed costs such as rent, salaries e.t.c will remain same, only the variables such as taxes e.t.c will go up.

Eventually, such a business owner will need to do more than twice the number projected, if his pricing is weak, to stay above water.
May 8 at 1:39pm

Segun Ogunlana
@Suleman; thanks for compliments as I forgot to add cost of operations/management to my pricing strategy. Considering your first state, its a great one that will/works well in this part of the world as short term investments/ideas/approaches are the way forward due to investors wanting their money back quickly.
If you are fortunate with the right facts to get seed investments to invest in your long term business idea, then you could have you cost price go higher than youyr selling price in the early stages.
Even the pricing strategy will have to depend on the nature of the Market; either a new, existing, resegmented or clone market.
Its a bit complicated depending on the nature of the business.
Cheers!!!!
May 8 at 1:41pm

Suleman Abdullahi
Mo, thanks for the observation, i tried to simplify the whole thing to pass the point. As i mentioned earlier, you need to consider your situation and set the price according. You brought out a dynamics that could and should be taken into consideration when deciding on prices.

The whole point is, if you don't do it right, it won't matter how many units you sell, you will be running at a lost and it will eventually catch up with you.

Mo, thanks once again for pointing it out.
May 8 at 1:46pm

Segun Ogunlana
@Alsu; I also understand that sometimes, when we have an innovative product, we might be short-changed by the market. That is the real value and perceived value. We need to work well on the product with different revenue tactics (just like the government as you say has various taxing strategies) just to maximize ROI. And for the rest, I guess @Suleman and @Morakinyo have done a great job making you see it from my/our angle. Cheers!!!!
May 8 at 1:56pm

Suleman Abdullahi
Segun i agree that pricing depend on the type of market. And yes, a business will run at a lost until it breaks even and then show a profit. A business started with huge capital, such as building a large cement factory, can take up to 25 years to break even before showing a profit.

But all will depend on the pricing of each bag of cement. If the pricing is done right (it takes into consideration all the necessary cost dynamics and put a margin of profit), the business might take 25 years to break even and show a profit but it will eventually show a profit.

On the other hand, if the pricing per each bag of cement is done wrong, the business would never break even and will never show a profit. It will just be a money drainer.
May 8 at 1:57pm

Segun Ogunlana
@Suleman; certainly and I must commend your scenario method o explanation. Its great. I'm still an amateur in that but I will surely get better IJN. Cheers!!!!
May 8 at 2:00pm

Olabamiji Ariwoola
@Segun I mean where a nation ration the price of goods in the business sector to take its place in the business community for example buying from farmers at N5 to fixed the price at N4 in the market hereby the producer gained and the society benefited from their tax.When government facilitate price of basic facilities it is based on what is right and not who has the right hereby being systematic in helping the poor!
May 8 at 2:10pm

Segun Ogunlana
@Olabamiji; I see. I guess your background should be in economics. Its the same United States does by supporting their agricultural sector which I think is done in europe also. You keep the price very low for your locals in the international market. If that is to be done, then the government will be making money from somewhere else and will have a programme/agenda of supporting the agricultural sector or any other sector it think deserves the incentives.
May 8 at 2:46pm

Bode Lawal
Setting a competitive price can only be difficult for a shylock with a profiteering mindset businessman.
But for a learned and visionary bizman,who knows that he has to cultivate and plant before he reaps fruits,will do everything to dominate the market via high quality ptoducts and fair pricing.
May 8 at 2:49pm

Olabamiji Ariwoola
@Segun you are right,I observe this in European Govt.!
May 8 at 2:53pm

Read 824 times Last modified on Monday, 04 May 2015 04:45
Segun Ogunlana

A social innovator, a fixer, who likes to make a difference and get things done better. His focus covers Project Management, Systemic Innovation, Product Development, Design Thinking, Business Strategy, Set-up & Development. Some call him a super manager, natural marketer and sales man. He is a Chelsea fan too.

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