How to set your pricing in a cost-of-living crisis

How to set your pricing in a cost-of-living crisis

Setting the right price for your products or services is like finding the perfect balance on a tightrope.

If you go too low, you risk short-changing your hard work and the value you offer, but swing the price too high, and you might find yourself alienating potential and current customers.

The key lies in finding that perfect balance where both you and your customers emerge feeling like winners.

In times like these, when the cost of living is soaring globally, brands need to step into the shoes of their customers more than ever.

It's crucial to truly understand how people are changing their spending habits and priorities so you can be sure you are pricing your products effectively.

Market research

The first thing you will need to do before you start putting prices on your products and services is understand what your customers are willing to pay.

To find out this data you’ll need to do some competitor research to see what they are charging for similar products to your own.

While you should use this data to help you determine your pricing, you should never just automatically put yours at the same price.

You don’t necessarily know the quality of the product they are selling in comparison to your own or what their overheads are.

Reevaluate your cost structures

If you’ve already got cost structures in place, you should take another look at them.

You might be able to identify where costs can be reduced without compromising the quality of your product or service.

This can be achieved through renegotiating contracts with your suppliers to optimise your operational efficiencies and help minimise wastage.

For example, say you owned a small bakery, and you are facing a rising price of wheat, you could strike a deal with local suppliers for bulk discounts on flour or seek cheaper alternatives without compromising the task and quality of your treats.

Highlighting the value of your product

Don’t focus solely on the price of your product, also make sure to highlight the value it brings.

The customer should feel like they are getting more for their money, so by showing them the benefits of the product, its unique features and the solution it can offer the customer may decide the value surpasses the cost.

Flexible pricing strategies

Flexible pricing can help accommodate customers facing the financial constraints of the cost-of-living crisis.

So, offering discounts, promotions or even bundling options can make products more accessible without breaking the bank.

Tiered pricing or subscriptions could be an ideal solution to helping customers buy products and services that fall within their budget.

Diversify your revenue streams

Explore avenues to diversify your revenue streams to buffer the impact of a cost-of-living crisis.

This could include expanding your product lineup, venturing into new markets, or exploring alternative distribution channels. Diversification spreads risk and lessens dependence on any single source of income.

Psychological pricing

The psychology of pricing is all about the art of perception, making a product seem more affordable than it really is.

Take £9.95, for example—it feels like a bargain compared to £10.05, despite the tiny difference.

However, studies have also found that round numbers, like £5.00, can actually convey trustworthiness and a sense of premium quality. So, it’s all about finding a way of making prices look appealing and maintaining a sense of value and trust.

Calculate your costs

To figure out how much to charge your customers, you’ll need to get a handle on your 'break-even' point – the magic number you need to cover your costs without any extra profit.

Think of it as the amount you've got to bring in to keep the lights on, pay your staff, and keep the wheels turning, without making any extra money.

To nail down this figure, you'll need to look at your variable costs, like the items you use up with each sale, and your fixed costs, which are the regular bills that don't change, like rent and insurance.

These costs might be listed monthly or weekly, except for special gigs like catering for a weekend music festival or setting up a quick pop-up shop for a day.

Once you've got all your expenses noted, divide that by the number of units you're selling to get your break-even cost per unit. That's the number you need to aim for just to keep your head above water.

Add your profit

Once you have your break-even figure you can then look into what markup percentage you can add to make a profit.

Your market research will guide you in determining the appropriate markup, but it's crucial to also consider your target customers and their willingness to pay.

Mark-up represents the difference between the cost price and the selling price. Typically, mark-up percentages range from 10 to 50 per cent, but in some industries or services, they can go up to 200 per cent.

Higher mark-ups mean more profit, but only if you are actually able to sell the units.

If you don't, your profit will decrease.

When it comes to pricing, there are no universal rules or best practices to guarantee success. The right price depends on various factors, such as the time of year, customer’s willingness to pay, business goals, and competitor actions.

Our best advice? Don’t rely solely on pricing to perform miracles for your business. Ensure that your products, place, promotion, and price all work in harmony for the best results.

Have any questions or want any advice on setting up your product and service pricing? Get in touch with our team today.