Pricing is always an interesting subject – especially for social entrepreneurs, who often think only of the social and forget that without the right price there won’t be any money to achieve their social purpose.
Know what you are worth
Most people totally undervalue their worth and the value of their product or service. If you price yourself cheaply people’s first reaction is to ask what’s wrong with your product or service. How many people still choose Heinz Baked Beans compared to the own brand ones – purely because they think they are inferior because of their price?
If you are selling a cake and you describe it as a basic sponge cake with value ingredients people will not be prepared to pay as much as when you describe the cake as a luxury sponge cake made from a traditional recipe and fair trade ingredients. Your price is determined by the value your customers attach to what you are selling.
Pricing is actually all about marketing – if you can’t explain the qualities, attributes and values of your product or service clearly, then your customers won’t value it fully, and you will struggle to achieve the sales price you desire.
Understand your costs
Another way to work out your price is to tip your budget upside down – work out the costs of running your social enterprise first (including your salary), then figure out what price to sell at.
Let’s say that you work out your price first – at £100 a day because you think that’s reasonable. Then you calculate my costs and these are £100,000 for the year. You would have to work 1,000 days to cover these costs – which would be impossible when there’s only 365 days in a year!
If you know your costs are £100,000 and you only want to work four days a week (let’s say 200 days in a year), then your price needs to be £500 a day to cover these.
Think about what your product or service offers, its key benefits and qualities, and then do your pricing. If you know your value and your worth, it’s not about what your competitors are charging. So will your social enterprise be pricing your product or service as a basic tin of beans or do you know your worth?
You can use a number of different pricing methods, as long as you are generating enough sales and surpluses to make your social enterprise sustainable. You want to be remembered as the social enterprise that has traded for 10 years, not the one that closed after 18 months! Below are some of the pricing models that you may choose to use within your business.
The absolute minimum price you ought to ever charge is full cost/breakeven. This is in effect the position organisations that have grant funding are in – they receive money to cover the project costs but never make any surpluses on the grants. This is why trading is often better – as you have the freedom to set your own price and make sure you are covering all your costs not just project activity.
Breaking even isn’t a great position to be in – you really want surpluses so you can do more social good, develop new innovative products and services, and be entrepreneurial.
This method takes all your costs and then you add a percentage on for profit. Typically you’ll want to aim for a profit of around 20%, as this will give you some money to reinvest in your social enterprise and also to develop new products or services.
Competitive (Going rate)
The next pricing method is going rate – typically used when your product or service is broadly similar to that of your competitors. Petrol stations are a great example of this – when one increases their price they all follow! You’ll need to do some research to find out what your competitors are charging. Once you have this information you can decide where you want to position yourself. Cheaper than your competitors can indicate your product or service is poor quality etc. whereas if you want to price higher than your competitors you’ll need to be really clear about what makes your product or service better.
If that doesn’t appeal, and you are looking to become the next Jamie Oliver and have your branded food products in the supermarkets, then you might use penetration pricing. This is where you set the a low price initially to secure high volumes of sales. If you are selling food or household goods this is a good strategy, as even though you may only make a few pence on each sale you will be selling 1,000’s every day.
The opposite of this is price skimming – ideal for products with short life cycles – computers, mobile phones, Playstations and DVDs etc – where you have a high price but sell low volumes initially. These products appeal to the person who always has the latest gadget or phone, and are prepared to pay a high price, rather than wait a couple of months until the price is lower.
The next method is prestige pricing, where customers are prepared to pay more for higher quality goods and services. Have you ever been offered a bottle of Chanel perfume for £3? You would wonder what’s wrong with it – our perception is that high price equals high quality, and charging £3 for your exclusive perfume would actually damage future sales.
Value Based Pricing
This is largely defined by the benefits and qualities of your product/service. Are you selling the own brand bread, the premium bread or the organic/seeded bread? Each of these is targeted at customers who value and pay a certain price based on the perceived value.
This is a great way to become clear on the value factors or benefits your product or service offers. For example:
- Quality of the raw materials
- Finished product performance
- On-time delivery
- After-sale service
- Experience level of the service provider
- Difference for customer of the final deliverable
- Turnaround time on phone calls/emails
- Ability to meet deadlines
For those of you that provide products or services to a range of different customers a great method is price discrimination – where you charge different types of customers different prices for the same service. Examples include training, concert tickets and off-peak specials. Or finally, try psychological pricing – £9.99 instead of £10.00 always seems so much cheaper for some reason!
Pricing too low
Pricing too low is the biggest mistake you can make. This phrase comes up regularly when I talk to social entrepreneurs. “We need the work – let’s set really low prices so they buy from us.” The consequences of this decision are:
- Won’t be able to cover costs
- Positioning yourself as cheap/budget product/service
- Attract price conscious customers who are not loyal
- Very difficult to raise prices in future
- No room for negotiating
- Potential cash-flow problems
Offering a discount
If the person won’t buy from you it can be tempting to offer a discount to get the work. But, by agreeing to a discount you are saying your product or service was overpriced and not worth what you originally said. A way to avoid this is to match the discount with a reduction in the product/service e.g. longer delivery time or more junior staff time etc.