Step 4: Set your price

Now that you know your total cost for producing one unit, you need to decide how much you are going to sell each unit for. This is called your ‘Pricing Policy’.

There are 6 main ways you can set your pricing policy:

Cost Plus Pricing

  • Adding a % to your unit price to give yourself a profit. E.g. adding 10% to a unit cost of 5 euro = 5.50 euro selling price. This 10% is known as your ‘mark-up’.

Competitive Pricing

  • Setting your price very near the price your competitors charge.

Loss Leaders

  • This applies to mini-companies that are selling more than one product
  • You set your selling price at either the same as your total cost per unit or slightly below. The reason for this is to get customers interested quickly. Your aim is to get your customers to buy another one of your products as well that you have a higher mark up on.

Penetration Pricing

  • Setting your price over your total cost per unit but under your competitor’s price. The aim here is that you win over customers from your competitors and you then have the option of raising the price.
  • An example of this is how magazines offer their first edition at a reduced price or special price and then charge you full price for all other editions.

Creaming Pricing

  • Making your price high on purpose because your product is unique and is considered a luxury.

Price Discrimination

  • Charging different prices to different customers. For example offering a reduced price to old age pensioners and students.
Finally…Now that you know what it is going to cost you to make each unit, go back and look at your market research. See what price your potential customers said they would be willing to pay for your product?Add your profit margin to your ‘Total Cost Per Unit’ – what’s the difference between this and the price your customers will pay????