Regardless of your business’s size, the industry you’re in, or the products you sell, setting the proper prices for your goods is essential. The catch is that knowing how to price your product isn’t always straightforward, especially if you sell niche items.
Worried about setting the right price? We’re here to teach you how to set a price for a product. Continue reading to learn everything you need to know about pricing products.
Why getting your pricing right matters
We should start by explaining why knowing how to price your product is so crucial for your business’s success. The right price offers the best cost-to-value benefit for your customers. They won’t think twice about paying for your product because they understand it’s well worth the price you set for it.
But before you go out and set the absolute lowest possible price for your item, consider the fact that customers may see low-cost goods as low-quality products that are cheaply made. For example, if your competition has an item for sale that’s twice as expensive as yours, they may think that the competition’s product is twice as good.
Of course, that’s not always the case. There are situations when pricing your product too high can scare off customers, resulting in them purchasing a competitor’s product. This scenario is more common among everyday products (like groceries), as opposed to luxury goods.
The key is finding the middle ground between what your customers expect to pay for a high-quality item and the maximum they’re willing to pay before going with another company’s product.
Now that we’ve established the “why” behind accurate pricing, let’s get into how to calculate pricing for a product. Follow these 3 simple steps.
Step 1: consider your costs
The first thing to consider when pricing a product is how much it costs you to make or get it. This is known as your cost of goods sold, or COGS, and it’s key to establishing your gross profit margin. It’s important to note that COGS only considers the costs directly related to production, like materials and labor.
The more your product costs to make or get, the more you’ll need to sell it for. While you may move a lot of inventory by selling a product at a low price to shoppers on a budget, you’ll go out of business pretty quickly if you’re selling the item for less than it costs to produce.
Some industries ignore the COGS for certain products because companies make up their losses with other items. For example, video game manufacturers lose money on each console they sell, but they make up for those losses by marking up the price of games.
Assuming you’re not in the video game industry (or another industry where the standard pricing strategy ignores COGS), you need to always make sure your product’s price exceeds its cost of production.
It sounds easier than it is, but if your COGS is higher than what you’re selling your product for, raise the price or try to figure out a way to reduce your production costs.
Step 2: look at the market
Now you know how low you can price your product without losing money on individual units, it’s time to take a look at what your competition is doing.
See how your competitors price products that are similar to yours. Take notes on the absolute lowest item you can find, as well as the most expensive option. While you’re searching online or in stores, see if you can find a “deluxe” or “premium” model offered by your competitors and jot down its price.
Along with shopping for your competitors’ products, read some online reviews of your products compared to what your competition sells. Put yourself in a buyer’s shoes when you’re doing this research. Keep in mind that many of your potential customers will be doing the exact same type of research in order to get the best deal for the highest quality product.
Step 3: determine your value proposition
You may have already done this step when writing a business plan, but now you’ll need to establish your product’s value proposition. To put it in non-business terms, define why a customer should buy your product.
Do you want your product to be the low-cost choice for people on a budget, or should you set your price on the higher end to showcase that you’re selling a luxury good?
There’s no right or wrong answer to this step—it all depends on how you choose to market your product (and even your business as a whole in some situations). If you’re having trouble coming up with a value proposition or developing a total marketing and branding campaign, you may want to consider hiring an outside marketing agency to help you out.
Experiment and adjust (when necessary)
Whether you’ve noticed it firsthand while shopping at a store or have gone through it all from a business perspective, you’re aware that prices change. Some product prices are more volatile than others, but very few things stay at the same price forever.
From nationwide inflation to an increased shipping cost, there are a ton of different factors that can affect the way a company prices its products. Many times, outside factors cause prices to increase, but that’s not always the case. It’s up to you to monitor your industry’s environment and adjust your product’s prices as needed to ensure you’re bringing in a profit.
You may also want to run some tests on prices if you’re concerned that your new product isn’t selling as well as you expected. For example, consider lowering the price for a certain time period to see if people respond better to a lower price point. Conversely, you can also try raising the price if your item is flying off the shelves. It doesn’t hurt to increase the price a bit to see how much people are willing to spend on your new product.
Have confidence in your product and its price
We’re confident that you’ll be in good shape if you’ve followed all of our tips on how to price your product, but don’t forget to have some confidence in yourself and your new product’s price! If you don’t have confidence in your work, it’s hard for any of your employees or customers to have any faith in you.