What’s your product worth?
If you think creating the product was hard, this question can feel like a doozy. Products pricing isn’t as simple as choosing a dollar amount out of thin air to assign to your new item.
It takes research, math, and a lot of consideration in order to ensure you’re getting the most out of your profit while still being reasonable enough to evoke steady sales.
So what does this process look like? Beyond that, where do you even start? Below you’ll find a cohesive guide to help you decide your product’s price point.
Things to Consider When Determining Products Pricing
Regardless of the industry you’re in or what type of product you sell, your price point will directly influence your product’s success as well as your profit. This can be a tricky process. You have to cover all of the costs that go into your product’s production, transport, and marketing.
However, even the best products won’t reach their sales goals if the pricing is too high.
Before you begin, make sure you determine the cost behind running your business–and we mean everything!
- Property Leasing or Mortgage
- Monthly Fixed Expenses
- Inventory
- Labor Costs
- Packaging Costs
- Shipping Costs
- Operating Expenses
- Etc.
Determine your target gross profit and compare it to your expenses to make sure your net profit meets your goals.
This will give you an idea of how many products you have to sell in order to reach your end goal.
The Basic Formulas to Pricing New Products
The next step takes a bit of research and math. First, explore your industry to determine the general market value of your product. On average, what does it cost?
Explore your competitors’ pricing and see how your product compares. If your item has added value others don’t, you may be able to get away with being slightly more expensive.
However, don’t price outside of your market’s range. Be reasonable and enticing.
Profit Margins and Markups
Once you have an idea of what your product should cost, grab a calculator and get ready to crunch some numbers as we determine your markup and profit margin.
- Your markup is the dollar amount that you add on top of your product’s cost in order to get the sale price
- Your profit margin is the percentage of profit made from your selling price
Markup and profit margin are not interchangeable. They are two separates sets of data. This is important to keep in mind, especially when executing your accounting.
To determine your profit margin, you subtract your chosen selling price from the total cost to create that product, then divide that number by the selling price. The result will equal your profit margin percentage.
For Example, if your selling price is $250 and your product cost is $100, your calculation would look like this:
- (250 – 100) / 250
The total for this formula is 0.60, which equals a 60% profit margin.
If you aren’t familiar with how to calculate your profit margin and markup, use this helpful site as a crash course. Practice the formulas until you feel comfortable with them, then start using them to determine your product’s selling price.
On a day-to-day basis, you will likely talk about your markup. Determine the percentage of markup you want to add to your cost, then consider that value.
If the pricing is too high, explore ways to cut back on your costs. It’s better to reduce your cost to lower the pricing than it is to reduce your markup. This way you can avoid a loss in profit.
Once you establish your markup, you’re good to go, right?
Wrong!
Your cost plus your desired markup is just a base price. Most products have multiple prices to consider based on who they’re selling to and in what volume.
Types of Pricing to Consider
Many products have various price points depending on where it’s sold, who it’s sold to, and whether the product is purchased in bulk. Below is a breakdown of some of the most common types of pricing, as well as their relevance.
Make sure you determine the right price points for every scenario your product may utilize prior to releasing it.
Wholesale Pricing
Wholesale is the price given to retailers and businesses who buy your product in bulk. Because they purchase in large volumes in order to resell your product at its market price, you have to offer a reduced cost.
Make sure your wholesale pricing is still profitable for you while giving your wholesale buyers the chance to make a decent profit as well.
MSRP
MSRP stands for Manufacturer’s Suggested Retail Price. This is the price most companies use or e-commerce platforms and brick and mortar retailers. It is provided by the manufacturer or wholesaler.
These price points aren’t very flexible, but they may be reduced anywhere between one to five cents for psychological pricing benefits.
Psychological Pricing
Most retailers use psychological pricing. This pricing strategy shouldn’t eat much of the profit on most products and it has proven to work well on consumers.
By simply discounting a couple cents below your ideal dollar point, you make your item look cheaper. For example, $4.95 or even $4.99 looks more enticing than $5.00.
Although we know that it isn’t a significant difference, it still feels more enticing to the eye of the consumer. It lightens the feeling of loss and causes them to feel better about their purchase.
Discount Pricing
Another commonly used pricing for e-commerce and brick and mortar retailers is discount pricing. This price point is to help push sales volume and gain an edge on your competition.
Most buyers will be bargain stores that buy in bulk so they can get a discounted rate that allows them to sell your product at a cheaper price. The reason you want to consider this ahead of time is that not doing so may lead to poor profit margins on discount pricing after your product releases.
Find a Business That Can Help
When it comes to building a business, products pricing is only half the battle. There is a lot that goes into ensuring success, including hiring great talent, managing your accounting and budget, and executing stellar marketing that reaches your target audience.
Find a business that can help you meet these goals. With our free database of small businesses and contractors, you can find the perfect US-based vendor to help you get the job done.
Begin your search now by browsing providers.