When you are setting up a business for the first time, it can be quite difficult to know what price to set. You need to think about what your customers are willing to pay what the competition is charging and your costs.

As a rule of thumb, it is best to aim high as you can, as you should always lower your price rather than increase it. If your price is low, you may attract a lot of customers but you may lose them if you need to increase the price. You may also be losing money because your price does not cover your costs. Customers may think that if your product is cheap, it can't be good. Customers would be happy to pay for quality - value for money is often the best option.

When comparing your product to competitive products, you do not necessarily have to follow their pricing. Ask yourself if your product or service compares favourably and whether you can justify a higher price.

When considering your costs, it would be helpful if you did a forecast [refer to: Forecasting]. This will allow you to be more informed and realistic about the price you charge. Bear in mind that you will need to charge a fair and competitive price with a reasonable profit. Your gross profit will need to cover all overheads and expenses. You take your money (your drawings) from what is left, that is your net profit.

Costing Formulae
There are three main costing formulae you can use to work out out a cost for your service or cost for your product.

1 Daily/Hourly Rate
If you are providing a service, for example consultancy, you may find it useful to cost your service based on time calculation. You do this by first adding the number of days you will not be providing a service in the year. This will include weekends off, holidays, bank holidays, administration (about a day a week) and contingency days for any emergencies. Subtract this figure from the number of days in the year and this will give you your potential earning days. Then work out how many hours each day you will work and this will give you your total potential hours for the year.

To calculate your daily/hourly rate the formula is:

Business Overheads (fixed costs pa) + PSB (Personal Survival Budget - money taken out business to live on) divided by Number of days/hours available to sell = Cost per day/hour.

2 Cost of Product
The formula below applies if you are making something that you are going to sell.

Business Overheads + PSB divided by Production (the total number of items you produce) plus the Variable Cost per item (the variable costs per item will be know when you start making them) = Total Cost per item.

3 Mark up and margin
You business can only exist if you make a profit. The profit can either be as a percentage of the cost price or the selling price. If the profit is based on the cost price, it is known as Mark Up and can be expressed as follows:

Selling Price - Cost Price
--------------------------------------- x 100
Cost Price

If based on the selling price it is known as Margin and can be expressed as follow:

Selling Price - Cost Price
--------------------------------------- x 100
Selling Price

When pricing your product, make sure that the selling price provides an adequate margin to produce a profit.

There is no definitive method of setting a price. Your aim should be to set your prices initially at the level, which gives you your highest profits possible. Easier said than done!

Suggested next reading: Raising the money