Pricing Your Product or Service

1. Cost and Price Versus Value

1.1 Successful businesses maximise their profits by matching their pricing with the value customers put on their products or services.

• The cost is the total outlay required to create a product or service.
• The value is what the customer thinks the product or service is worth. For a plumber to fix a burst pipe, it may be £5 for travel, £3 for materials and £10 for one hour's labour. But the value to the customer is far greater than the £18, so a plumber may charge up to £50. Computer printer ink cartridges can cost less than £5 to manufacture. However, to the user who can't print without them, their value is much higher. And so is the price.

1.2 Product pricing is often built on a 'cost-plus' basis (see 4), while service pricing is generally created on perceived value (see 6-8).

However, both methods require a complete understanding of costs and the competition.