Pricing is an often-misunderstood term in business, but it’s critical to understand how it works. First and foremost, price is the amount of money a customer will pay for your product or service when they purchase it. You should always know what your product or service costs you to make, and then add whatever profit margin you determine appropriate. This can be tricky to do, especially if you’re just starting out in business, so we’ve created this guide to show you how to determine your product’s price in the most logical and effective way possible.
Defining product pricing
Pricing a product can be difficult, but knowing the basics can help you determine what the best price point might be. One important factor when determining your price point is who your audience will be. Are they millennial consumers or luxury buyers? Another important factor to consider is how much competition you have for similar products in your industry. For example, if there are few competitors with prices in the same ballpark as yours, consider raising your price as a way of differentiating yourself from the pack. When setting pricing, it’s important to consider where you want your business or brand to fit in the marketplace.
Pricing as a percentage
One way to determine your price is by finding out what percentage of the final sale price each product takes. For example, if you sell kitchen items and dish soap, both cost five dollars but take up different percentages of the final sale price. With a dish soap, it will be about 5% but with a kitchen item it would be closer to 50%. If you are trying to determine what should be the base cost of your product, the best thing you can do is research and compare similar products on average prices so that you know what people are willing for it for pay for a similar product.
Another way to determine your price is by simply calculating how much money you need per dollar profit in order to stay in business.
Pricing with quality in mind
A product has two fundamental aspects that define its price: quality and scarcity. High-quality products with a low supply are expensive. In contrast, an inexpensive low-quality product is available in large quantities. Products for which the cost of production doesn’t exceed the anticipated selling price can be considered as a commodity. Pricing this type of product is done by estimating market demand and adjusting accordingly.
Defining value and the perception of value
If you’ve done your research and believe you have a product that meets the needs of your target market, you should now consider the price. You may want to set the starting price of your product lower than you anticipate it will be. Why? Because many people won’t buy a product they are not sure they can afford or do not want to spend their hard-earned money on something they are unsure about. Starting with a low introductory price will help potential customers become comfortable with your brand and products so that once the customer trusts your business and believes in what you have to offer, she/he will also be more willing and able to pay a higher amount for subsequent purchases. Once people start trusting your company, it becomes much easier to increase prices without risking any substantial drop in sales volumes.
Pricing your product
How you price your product will depend on many factors: What type of company you are running, the features of your product, customer demand, the economy and much more.
This process can be a little complicated, but there are some general guidelines that most people follow. These include making a profit and creating an attractive offer for your customers. Once you have figured out how much profit your business needs to make, this should affect how high or low your prices are set.
Pricing new vs established products
Pricing a new product can be quite tricky as there is little information about the product on the market, making it difficult to determine the value of your own. Established products are more straight forward as the industry often has standard price points for these types of items. The key difference between pricing a new and established product, in terms of profit margins, is that you will likely experience higher sales volume with an established product due to less competition from other manufacturers or distributors. This means your cost per item might be slightly higher but you should make up for this in volume sold. Keep in mind that industry standards also play into pricing, so research what similar companies charge before setting your prices too high or too low based on other factors like supply chain and manufacturing costs.
Price guides – how much do competitors charge?
To determine your product’s price, it helps to start by looking at how much competitors charge for the same type of product. You can also see what the market currently accepts as a standard and then adjust accordingly. Doing so will ensure that you’re pricing your product correctly, taking into account both quality and demand.
While doing research is important, know that there are no set rules on pricing. What makes sense for one person might not make sense for another. Try different prices until you find what works best for you, but remember that you won’t find out if something isn’t right unless you try it out first!
When to raise prices
If the cost of your materials, labor, and shipping have increased since you started your business, then it may be time to increase the price of your products. Even if that happens, it’s important not to adjust too quickly or drastically; you don’t want customers to feel as though their money isn’t worth as much. If you do need to raise prices gradually for a more sustainable increase in profit, mention these increases in advance with an email or social media post so customers know what they’re getting into when they make a purchase.
When should I change my pricing?
Your pricing should change as your business evolves. For example, if you have been selling a product for $10 for five years and have an innovative idea that might revolutionize the market, it would be wise to re-evaluate your pricing. If the new idea would generate more profit than continuing with the old product, it could make sense to drop the old one and focus on marketing this new one.
Subscription services – monthly, annual or both?
Monthly pricing requires a customer to pay every month and can sometimes feel pricey or take away the excitement of getting a new product. Annual pricing, on the other hand, gives customers the chance to use products for a longer period of time but at an increased monthly rate. Companies like Adobe provide annual plans that are cheaper per month than paying for monthly payments and this plan also includes updates with their software, saving on any additional updates. Since subscription services are convenient for both companies and consumers, it helps justify higher prices because people do not have to worry about purchasing every month. For example, Spotify provides all its music for $10 per month as opposed to buying songs individually from iTunes which could cost up to $1 each.