Why pricing can make or break your business

For anyone stepping into business, few decisions feel as simple but carry as much weight as setting a price. It’s not just about attaching a number to a product or service; it’s about understanding value, covering costs and positioning yourself in the market. Get it right, and you build a sustainable business. Get it wrong and even strong demand may not translate into profit.

Financial literacy expert Patrick Wameyo says that pricing a product or service starts with understanding everything that goes into getting it ready to sell. This includes the cost of buying materials, transport, packaging, and all the small expenses.

Not all costs come from making one single product or service, he says. Some costs, like rent and electricity, support everything you produce, not just one item. So, you will need to spread the rent cost to all the items you make to get the exact cost of each product.

He insists on getting the actual cost of production right, since a price that is too high or too low. After adding up all these costs, a business then adds a small extra amount to arrive at the selling price.

“Once you have the cost of production, you should add a margin, which is a percentage, and 10–30 per cent is the normal. “The returns, or the profit, are what is termed the margin,” Wameyo says.

However, the margin should be different when you are in a new or high-end market. He explains that in this case, pricing starts higher than 20 per cent as businesses test how customers respond.

He also notes that there is no perfect price except the one that is set by the competition. He advises looking at how competitors are charging and setting your products in that way, since businesses watch how customers respond.

“Typically, competing products or services are the first basis of knowing if you have priced too high or too low. A good business has to make a profit,” he says.

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For products or services with no market comparison, he says the starting point is still to understand the full cost of production and then add a reasonable return.

Pricing also depends on the kind of customers a business wants to reach. In some markets, a product or service can be priced higher because of how it is presented. Branding affects how people see price; a strong brand can make customers feel a product is worth more.

“Branding is an aspect of perceived value. For some market segments, you can add bigger margins based on perceived value, for instance, if a product is packaged luxuriously,” he suggests.

He further insists on understanding the target customer, as it strongly determines your market pricing. Different groups of buyers are willing to pay different prices.

Prices also increase or decrease depending on supply and demand. When goods are scarce, prices go up, and they go down when the supply is high.

Discounts and offers, he says, can help attract customers, but they should not last forever. They should only be tools that are used to increase demand for a product or service.

When launching a new product or service, he advises taking the time before setting a final price by testing the market.

“You test the market appetite and then you adjust to the market price. Avoid setting it at a low price because once people get used to a low price, it is hard to raise it later,” he advises.

Many people, he says, struggle with pricing because they set it too high or too low.

“When it is too high, you don’t get the traction you need; when it is too low, you gain traction but won’t make profits. Every product or service should make a profit,” he states.