Accountants may be the frequent butt of jokes, but there’s no denying that they usually know their figures. However, when it comes to setting prices, your accountant may not necessarily know best. The traditional approach to price setting is to base them on the costs incurred, then add to it a decent profit margin.

At first glance, this strategy seems to make a lot of sense and has been used by thousands of businesses over the years to great effect. But times are changing and, given the current economic climate, this approach is no longer valid. Today consumers not only want great products, but they expect to get the best prices and, with the advent of the internet, it is now easier than ever for your customers to shop around to get the best deal. And don't think you can rely on customer loyalty. This will only get you so far - if you're not offering the most competitive deal, chances are you'll lose the sale, no matter how long that customer has been shopping with you.

So, how should you set your prices? Like most things, your starting point should be to look at your products through your customers’ eyes. You need to start with the price that customers will be willing to pay and work backwards to ensure you are able to deliver your product at that price while engineering the costs to make sure you're still delivering the right margin for you. To assist you in developing your pricing strategy, try asking yourself the following questions:

Your Market

·   Where does your brand sit in the marketplace?

·   Where does your product sit in the marketplace?

·   How much competition do you face?

Your Customer

·   Who is your target customer?

·   What is their geographical / demographic profile?

·   How price-sensitive are they?

·   How often will you have a chance to sell to them, i.e. how much repeat business can you expect and what is their lifetime value to your business?

Your Product

·   Is your product unique or is it a commodity?

·   How easy is it to differentiate your product in the mind of the consumer?

·   Does your product have a limited shelf life?

·   Where is your product in its life cycle (i.e. is it new and exciting or is it about to be superseded by newer, better alternatives)

Pricing / Promotional Factors

·   Do you make your profits by selling high volumes at a low margin or lower quantities at a high margin?

·   Should your prices be fixed or variable? (Think about airline or hotel pricing)

·   How easily can your products and prices be compared to others?

·   Will your product deliver a decent margin even when on promotion?

·   Does a promotion have to mean money off? (Think about free upgrades/additions)

The above questions should help you devise a pricing strategy that you’ll be able to apply to your entire product range. But remember, whatever you decide to charge it has to be fair, both to your customers - you need to give them good value for money - and also to your business: the price should fairly reflect the value you've created.

Once you've determined your selling price, the next step is to look at your product costs and profit margin, comparing it against some kind of benchmark such as a company average or a target margin. If the margin is too low you should focus on trying to reduce your costs by considering the following:

·   Using alternative suppliers

·   Buying in larger quantities to receive bulk discounts

·   Using alternative materials

·   Outsourcing production

·   Finding operational efficiencies within the business

If, after looking at all of your cost elements, you are unable to supply your product for the right price at the right margin then, despite what your accountant may say, don’t just put up your prices. Instead, you need to seriously consider whether you should be selling that product in the first place.