Ainsworth & Co, Chartered Accountants and Business Advisors.

Pricing: What Price Should I Charge ?

What price should a business charge for its products and services?

Is it possible to charge different prices for what might essentially be the same product or service?

There are many considerations, here are a few:

• Ordinarily, the aim is to make a profit over the cost of supplying the product or service, this is called 'Margin'.

• Whilst people will pay more than they want to, they will not pay more than they are willing.

• It might be possible to charge more, or less, to different people, by making small or no modifications.

• Giving 'value for money' creates satisfied customers, which in turn creates referrals.

• 'Loss leaders' have an important role in attracting business.

• Footfall is imperative.

• People buy under different circumstances, eg. leisurely browsing, whims, last minute, to impress, to survive, legal requirement, peer pressure, etc.

• Other suppliers to your market are different to you.

• There are many ways to calculate the cost of supplying the product or service.

• Some customers will be more valuable than others to your growing business.

• Give yourself time to establish your business.

• Some people have more to spend than others.

Willingness To Pay

Understanding 'willingness to pay' will give you insights for designing your products and pricing policy.

People will only pay if they are willing, but some people are more willing, or less willing, than others, for a variety of reasons, but ideally you will want to sell to everyone, and maximise your profit on each sale.

When people purchase a product, there is a possibility, maybe a probability, that they would have paid a little more. Alternatively, someone who didn't buy it, might have paid less and you would still have made a profit.

Ever bought an ice cream for £1.40, but you would have paid £1.50? Someone is missing out on a lot 10p's. Or you saw an ice cream and £2.30 and declined, or someone was putting the pressure on! There's lot's of inexpensive ways of dressing up an ice cream and charging more.

Another example, if you buy a plate at a wholesalers for £2, then try to sell the plate on a market stall for £5, the chances are you will sell it. However, someone who bought it for £5 would have paid £7, so you missed out on £2. Also, someone else would have paid £4, but your price was £5, that was another £2 profit missed.

The 'more' that a customer will pay is called 'consumer surplus', and a profitable business will want to 'maximise' the consumer surplus, so how is this done?

Here are some examples of what are basically the same product but are sold at different prices: rail fares, books, postage stamps, beer, Easter eggs, cars, milk, insurance; the list is endless.

The pricing policy in all of the above recognises that people are willing to pay different prices. So for example with books, the hard back is released first to 'cream off' the extra willingness to pay, ie. to maximise consumer surplus. With Easter eggs it is inexpensive packaging that gets a higher price for chocolate. With beer it is the place of supply (eg. restaurant, pub, social club) which leads to different prices and a range in willingness to pay. With milk it is the local shop which charges more for the convenience.

Here is a list of regular commercial techniques to obtain the best price which people are willing to pay:

• Packaging (hard back books)
• Timing (eg. seasonal / birthdays / Mothers' Day)
• Service / quality levels (eg. rail fares)
• Discounts (happy hours)
• Location (ice cream vans)
• Demographics (eg. pensioners' prices / children's prices)