How to set a price

Getting the price right for your product or service is one of the hardest decisions for any business. But most experts agree that it is far better to risk pitching prices too high than too low. If you find you have to adjust prices customers will react better to a cut than to a sudden hike.

Max McHardy, director of franchise and commercial solutions at BDO Stoy Hayward, says the key to good pricing is to know where you fit into the marketplace. If you describe yourself as "luxury" or "five-star" customers will expect to pay a premium. Low prices might even put some people off because they will be worry that you are cutting corners.

But if value for money is part of your brand then your prices must be competitive. Any company that uses the word "pound-stretcher" or "budget" in their advertising must keep an eagle-eye on their rivals.

Different sectors

The frequency with which you change prices depends on which sector you're in. Pricing in capital goods tends to be slow moving, whereas service industries have much more complex pricing structures.

Hotel and airline customers, for example, expect to pay different rates depending on the time of year or how prepared they are to shop around. But clients in manufacturing industries aren't used to price fluctuations and will only tolerate different prices for different customers if someone is buying in bulk.

Many service industries change their prices several times an hour if their product is perishable. An unsold theatre seat, airline ticket or hotel room brings in no revenue whereas offering a cut-price deal at the last minute will help to cover costs.

Justify your worth

If your product is more expensive than your competitor's be prepared to educate customers in the reasons for the higher tag.

• Use PR and advertising to prove why your product is better;
• Support the product with in-shop displays and packaging;
• Make sure retailers are aware of its benefits and can demonstrate them.

Cover your costs

There's no point in being the cheapest in town if you don't make a profit. When working out how much to charge bear in mind that your gross profit must cover your overheads and expenses. There are three main ways of working out a costing formula: