An essential task when starting a business is choosing the best price for your product. As easy as that may sound, sometimes it can be a little tricky. If you price your product too high, your sales may suffer. Price it too low and you won’t make a profit. This guide will teach you how to price a product and give you the knowledge you need to succeed.
How To Price a Product
When pricing your product, your goal is to strike a balance between what a customer is willing to pay and what is most profitable for you. The price you choose should cover all your expenses and operating costs and then allow you to make a profit after that. So, the first number you need to determine is how much it costs to run your business. Do this by adding up all your overhead costs and expenses, which include:
- Loan repayments
- Rental equipment
- Inventory and shipping
- Property lease and utilities
- Marketing and advertising
- Salaries, wages and commissions
Once you have this number, you will use it to figure out the individual cost of your product. This is how much it costs you to sell just one of your items. To do this, divide your total costs by the number of items you plan to sell. The result is the individual cost of your product. Next, you will take this number and apply it to one of the following pricing methods.
Types of Pricing Methods
There are multiple methods you can use to calculate the price of your product. Here are three types of pricing methods that are commonly used.
Cost-Plus Pricing
One of the easiest methods to use when first starting is cost-plus pricing. To come up with this figure, you first calculate the individual cost of the product as previously mentioned and multiply that amount by the percentage of profit you plan to make. Then take that number and add it to the individual cost. This will give you the price of your product.
Before using this method, make sure you’ve calculated your individual cost correctly and included all your expenses or you could end up with low profits. To use the cost-plus method successfully, the product price you calculate should be large enough to cover all your costs and provide you with the profit margin you want.
Competitive Pricing
A method often used to price commodity products is competitive pricing. It works best in markets where there is already an established price for the product you want to sell. Since commodity products like cereal or toilet paper are hard to differentiate, normally the company or brand whose products dominate the market will set the price that everyone else gauges theirs around. When using this method, be sure to research the prices of your competitors and compare your product with theirs before establishing a price. If your product offers more value, you may be able to justify selling yours at a higher price.
Demand Pricing
Demand pricing is harder to calculate because it is based on volume and demand. Products that are calculated using this method are usually sold through multiple outlets and at different prices. Distribution channels include retailers, wholesalers and discount chains. The price a wholesaler charges will be different than a retailer since they can purchase and stock more units for less money, and profit off a large number of sales at a lower price. In contrast, retailers tend to charge customers more because they have less space to stock products and have to pay more per unit.
As a first-time business owner, product pricing can be difficult. If you begin to struggle with this, investing in a business consultant like Benjamin Naderi will be a big help for you.
When To Review Prices
Knowing how to price a product is great but it is something you may have to do more than once. Periodically you will need to review your prices to see how effective they are and if they need to be updated. Ask yourself questions such as what’s working and what’s not? Or which products are losing or making money? Also, take time to research your competitors and compare your prices with theirs.
Some of the best times to review your product price are when:
- You enter a new market
- Your costs increase or decrease
- Prices in your market start to change
- You start a new product or product line
- A recession or inflation affects the economy
Underpricing and Overpricing Risks
The price of your product determines how good or bad your bottom line will be. To keep your business profitable, you never want to underprice or overprice your product. There are risks associated with both that can harm your business and make a negative impression on potential customers.
Underpricing your product will give some customers the idea that your product is cheap and not worth purchasing. If your goal is to have lower prices than your competition, that is fine as long as it is still high enough to cover your costs and attract customers. Overpricing will also turn potential customers away if they feel your product is not worth the price you are asking. Keep all of this in mind when determining the best price for you.
Knowing Your Customers
An important part of pricing is knowing your customers and your target market. Most customers fall under one of three segments. They may shop according to cost, convenience or status. Once you’re aware of which segments your customers fall under, take this into consideration and price your products accordingly.
Learn How To Price a Product
Knowing how to price a product in the correct way is crucial to the success of your business. It is also an ongoing process that requires you to review your prices, competition and market frequently. This guide can help you get started with all of this. But if you need more information on how to price your product, contact Benjamin Naderi today and he can help you.