One of the most important choices you'll have to make as a business owner is how to price a product. Almost every aspect of your business is impacted by the price strategy you select.
It also has an impact on your clients. One of the most important aspects influencing a company's pricing decisions is price sensitivity. Customers today are well-informed about the products they buy, and they are price sensitive because they want to get the most value for their time and money.
Small pricing changes can increase or decrease profitability by 20% to 50%, according to studies.
Because of this, it's all too simple to become stuck on your pricing approach when you're launching a new company or product, but it's crucial to avoid letting the choice prevent you from starting. Launching and testing with actual customers yields the finest price information for business owners. Although market research is important, your pricing ultimately needs to be determined by what your clients are willing to spend.
Having said that, picking a price scheme can be challenging. That's why we wrote this manual, which not only explains how to price a product in detail, but also discusses key elements of a successful pricing strategy and the most often used pricing models in today's marketplace.
What is the pricing of products?
The process of figuring out a product's quantitative value based on both internal and external elements is called product pricing. Product pricing directly affects your company's entire success, including cash flow, profit margins, and client demand. Pricing methods vary depending on the business, the target market, and even the cost of the items. Subscription-based pricing schemes, for instance, are widespread in e-commerce. Competitive pricing is frequently the best course of action in more cutthroat markets.
How much should I charge for my products?
There is no lack of guidance on product pricing. Some of the advise is excellent, while other advice isn't so wonderful. Fortunately, pricing items profitably is a straightforward process. You may come up with a pricing plan and final price that works for you by conducting in-depth market research and understanding your ideal clients.
Pricing affects everything from your company's finances to where your product is positioned in the market, taking into account things like whether it's a classic, made-to-order, or passing fad. It also affects your ability to turn a profit while using online marketplaces. You must make this important strategic choice for your company, and it can involve both art and science.
However, you don't only get to make this choice once.
There is a relatively quick and simple method to set a starting price if you're seeking to determine the retail price of your goods.
To determine your first price, sum up all the expenses related to bringing your product to market, then add your profit margin on top of those costs. One of the simplest methods for setting the price of your product is this tactic, which is known as cost-plus pricing.
You're partially correct if you think it's too easy to use to be useful, yet this is how it functions.
You don't only get to choose your price once.
Why this pricing strategy works
Your pricing plan must support your business, which is its most crucial component. Your asking price must be sufficient to support your operations.
You will lose market share if products are priced too much and potential clients choose not to purchase them. If you set your pricing too low, you'll either be losing money or making an unprofitable profit. This makes scaling up growth difficult. Of course, there are situations when it may make sense to sell a certain product for less money if you discover that doing so increases the lifetime value of your customers, but this should always be done carefully.
Other significant elements need to be taken into consideration when setting your prices, such as how your prices compare to those of your rivals, consumer trends, and the implications of various pricing methods for your company and the expectations of your clients. You can also ask your current clients whether they think you should boost rates. You can begin experimenting with a higher pricing on a small subset of your current clients to see how they respond.
There are a few other crucial factors to take into account, though, before you can worry about deciding on the selling price for your goods.
How to set your product's pricing
The process of determining a sustainable pricing for your product consists of three simple phases.
1. Total your variable cost range (per product)
Understanding your costs is key to developing a pricing plan that works. When you order things, you can easily determine your cost of goods sold, or how much each unit costs you.
If you create your own items, you'll need to look more closely at a variety of your overhead, labor, and raw material costs. What is the pricing of the package and how many goods can you make with it? You will then have a ballpark figure for your cost of goods sold each item.
Don't overlook the value of the time you invest in your business, though. Set the hourly rate you wish to make from your business and divide it by the number of things you can produce in that time to determine how much your time is worth. Make sure to include the cost of your time as a variable product cost when setting a price to ensure that it is sustainable.
The final price you decide on should be the amount your target clients will consistently spend. Market research is crucial to your next move. Before rushing to your rivals, it's critical to understand how much your clients are ready to pay.
Cost of goods sold $3.25
Production time $2.00
Packaging $1.78
Promotional materials $0.75
Shipping $4.50
Affiliate commissions $2.00
Total per-product cost $14.28
In this example, your total per-product cost is $14.28.
2. Keep your profit margin in mind
It's time to factor profit into your price once you have a total for your variable costs per product sold.
Suppose you want to cover your variable costs as well as a 20% profit margin on your products. It's crucial to keep in mind two things when selecting this percentage:
- You still have expenditures to pay in addition to your variable costs because you haven't yet factored in your fixed costs.
- Make sure your price range still fits within the overall "allowed" pricing for your market by taking the broader market into account. Depending on your product category, you may find sales tough if you are twice as expensive as all of your rivals.
When you're ready to determine a pricing, subtract the desired profit margin in decimal form from your total variable costs and divide the result by 1. You would divide your variable costs by 0.8 if your profit margin was 20%, which is 0.2.
This provides you a basic price for your goods in this instance of $17.85, which you can round up to $18.
Target price = (Variable cost per product) / (1 - your desired profit margin as a decimal)
3. Bear in mind fixed costs.
Your costs don't just include variable costs.
The expenses that you would incur whether you sold 10 things or 1,000 products are known as fixed costs. They play a crucial role in running your company, and it's ideal if your product sales can also cover them.
It might be difficult to determine how your fixed costs fit into a per-unit price, which is why experimenting with multiple price points is crucial.
Using the data you've already acquired on variable expenses to populate the break-even calculator worksheet is an easy method to go about this. To save a copy of the spreadsheet that only you can change, select File > Make a copy.
It is designed to look at both your fixed and variable costs in one location, as well as how many of a particular product you would need to sell to break even at the set price.
Making an educated choice about how to strike a balance between paying for your fixed expenditures and establishing a sustainable and competitive price can be aided by these calculations.
Learn how to run a break-even analysis, what to look out for, how to evaluate your results, and how to make adjustments depending on them.
Using a price estimator for goods
Use a product pricing calculator to discover a competitive selling price for your goods. This will make life simpler and will allow you to understand how different price points may impact your company.
An excellent tool for calculating this is Shopify's profit margin calculator. It employs a cost-plus pricing technique, which calculates the ultimate selling price by first adding a percentage markup to the overall costs associated with producing your product.
Simply enter the gross cost of each item and the desired profit margin on each transaction to get started. Consider that placing your product on the shelf costs $20, and you want to increase the price by 25%.
Click "Calculate Profit" once your numbers have been entered. In order to determine the ultimate price you should charge your consumers, the program will put those figures through its profit margin calculation. The sale price is $25, your profit is $5, and the gross margin is 20% as you can see in the example below.
Play with the statistics to determine the ideal price point for your clientele and revenue. Increase your markup if you can charge more. From there, you can establish prices and begin making money from each sale.
Test various pricing techniques
Do not delay opening your store out of concern that you will select the "wrong" price. Pricing choices will constantly change as your business does, but as long as your price generates a profit and covers your costs, you may test and tweak as you go. Compare prices of comparable products to determine how your methods compare.
Value-based pricing is a common pricing approach, especially in e-commerce. With value-based pricing, you set your prices for your goods in accordance with the market worth of the goods and services you provide.
Are you unsure of the types of promotional materials your products might require? To improve your e-commerce packaging and unboxing experience, one of the most typical ones in this context is marketing materials or extra gifts.
By using this strategy, you may set a price with confidence since, when it comes to pricing, the most crucial factor is making sure your pricing enables you to develop a sustainable business. Once you've got it, you can start your business or introduce a new product, decrease prices, and launch it. Then, you may use client feedback and data to modify your pricing structure in the future.
