How Do You Price Your Product?
Pricing your products is one of the keys to business success. Proper pricing can enhance your sales and create a firm groundwork for a successful business. Improper pricing, on the other hand, can cause setbacks that your company might never recover from.
Proper pricing is not easy to achieve. It is part art and part science.
While there are numerous pricing strategies in business, there is no surefire, and one size fits all approach to calculating the right price for your products. To arrive at an appropriate price, you will have to consider some key factors including:
- Identifying your target customer
- Knowing how your competitor’s products are priced
- Understanding how price and quality are related
Let us look at each of these factors in greater detail.
Meeting Business Goals
Get Clear About Making Money
The first step in determining the right price for your products is to clearly define what you want your pricing strategy to achieve for you. Everyone wants to make money in their business. Making money means that your sales generate enough money to cover your costs and make some profits to expand your business.
Many businesses mistakenly believe that price alone drives sale. Your ability to sell is the dominant driving force for your sales. This means having the right sales strategy and salespeople.
Take note of the risks that accompany poor pricing decisions.
Undercharging your products can have disastrous effects on your business. In an attempt to increase sales volume, some companies choose to underprice their products to convince customers that theirs is the least expensive product in the market.
This approach rarely works. Why? Because consumers like to receive value for their money. Underpricing your products only makes you look cheap, and most consumers will not spend their money on someone who seems to have less value.
- That being said, overpricing your products will not be of much benefit to your business. Remember that your consumers will always be comparing your prices with those of your competitors.
Overpricing may also put your products way out of range for your customers or even decrease their desire to pay for them.
Factors to Consider When Pricing Your Products
Successful firms employ a combination of tools to help them arrive at the right price. An essential element to consider when setting your price is your customer. Knowing your customer will help you provide what they value and you will, therefore, be in a position to charge more.
Know Your Customer
To know your customer, you have to conduct market research. Market research can be anything from a simple survey emailed to your existing customers to a more extensive research project led by third-party companies.
Market research segregates your customers into small groups based on such factors as what they buy, their demographics, their sensitivity to price, etc.
If you lack the means to pay for market research, you can classify your consumers into one of these three distinct groups: the convenience centered, the price sensitive, and the one who is concerned about status. Once you have grouped them decide which group you want to target and come up with an appropriate price.
Know Your Costs
When pricing your products, it is crucial to ensure you cover all your costs and then add a profit. You, therefore, have to know the cost of your products. A product’s cost includes more than just the literal cost. It also includes costs such as shipping fees, stocking fees and fixed costs like rent.
Start by calculating the cost of raw materials, rent, labor, etc. so that if you sold the product at that price, you would break even. Next, decide what you want to make on this amount.
To make this easier, create a spreadsheet of all your monthly expenses. Such costs will include
- Your product cost including labor marketing and selling costs.
- All the operating expenses needed to run the business
- Debt service costs
- Your salary as the business owner
- Returns on capital invested by you and owners and stakeholders.
- The capital you need to expand your business and replace older assets.
List the amount of money you need for each then sum them up. The sum is a rough estimate of the gross amount you should make.
Know Your Revenue Target
Set a revenue target for how much you want your business to make. Add the cost of production, marketing and selling to this revenue target, and you will have a price per product for your products.
A more straightforward way for businesses dealing with only one product is to take an estimate of how many units you desire to sell in the next year. Divide this number by your target revenue. Your answer is the price you have to sell your product at to earn your target revenue and profit goals.
If you deal with different products, you will have to allocate your overall revenue target by each product and do a similar calculation to get the price you need to sell your products at in order to achieve your goals.
Know Your Competition
Your customers most likely look at your competition, you should too.
Check to see if their products are similar to yours and if they are, think about whether or not you can use their price as an initial gauge.
Also, check whether your products have additional value. Do you, for instance, offer an additional service or are your products of higher quality? If our answer is yes, then you can certainly charge a higher price. Don’t forget to consider regional differences and your costs.
As an entrepreneur, it is up to you to be relentless in managing the pricing of your products. Remember that your pricing could cause your business to fail or succeed.
Your Personal Branding Coach
Hannah Muchuki Githuki
Business Trainer Coach and Speaker
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