You have nailed your product/service and you know that it is going to be a hit. But you still need to figure out how much to price it…… Pricing can be a headache because there is no exact science to it; I find it to be a balance between an art and a science. This is one area that entrepreneurs do not always spend enough time on, and it can literally make or break your business. So, exactly how should you price your products?
There are a few things that you need to take into consideration, so let’s look at those first:
1. Your costs: How much does it cost you to produce each item?
Your costs include overheads such as rent, your salary (which you can determine by reading this post), and office expenses. All these costs need to be taken into account so that your product is profitable.
Use your monthly expenses to determine the total cost of delivering your offering. You can also use your expected number of items or services to be sold each month to determine the average cost per product/ service
2. Your time: How much time do you spend creating and delivering your products?
Often, entrepreneurs forget to add in the cost of their time. How much time did you spend producing the product? For a service-based business, how much time do you spend preparing your service and delivering your service to your client? If your time is accurately reflected in your salary, then you can skip this step. If not, then determine how much time you spend on each item that you are selling, and use an hourly rate that reflects rates in the market to determine the total cost of your time per product.
3. Your target market. How much are the willing to spend?
Do you want to provide a low cost convenient product or do you want to sell a high cost luxury item? There is no right or wrong answer here; you just need to know what type of product/service that you are planning to sell, and who your customers are, so that your pricing is reflective of this.
4. Perceived value: How much value are you adding?
You do not want to price your offering too low that people think you are selling something of low value; at the same time you do not want to price it too high so that people feel that you have overvalued your item. Market research would be useful in assessing how similar products/services have been priced before.
5. Competitors: How much do they charge?
It would be short-sighted to ignore your competitors when determining how to price your offering. If you have done your research properly, then you should be able to determine who your competitors are, and you can do mystery shopping to get a better understanding of their pricing. The pricing of your competitors will give you a good feel of an acceptable price if you are offering something with similar value. Of course, if you are giving higher value, then you can easily hike up your prices.
How to determine the price of your product
You are now ready to determine the actual price, and this does not have to be fixed forever. You can tweak your pricing as you get more information and feedback from your customers and competitors or if your costs suddenly change.
You can determine your price using a top-down or bottom up-approach
Add all your expenses, and then determine the profit percentage that you want to earn from your products. This profit percentage can be anything from 5-50%, but it is best to do some competitor analysis so that you are not so far off in your pricing.
Add the profit percentage to your costs and that will give you the price of your product.
* Remember to include tax costs, even if you are unsure of exactly how much tax you will be required to pay at the end of the year.
Determine how to price your product, based on your competitor and customer research. After deducting your costs from this price, the amount remaining is your profit. You can then make a decision as to whether the profit is acceptable to you.
Make sure that the price makes sense in both approaches, by testing it. You can market it to a few customers and request for feedback on your pricing. But don’t let this alone lead you to make changes in your prices. The best approach is to set your prices for a few months before reviewing them.
If you are not able to sell at the prices that you have determined, then you might need to look at a few other areas in your marketing and sales plan before changing your pricing:
- Does the number look realistic?
- What are your competitors doing?
- What have you done in the past?
- Do you need to market more? Do you need to reduce your price to sell more or increase the value of your offering to attract higher-value customers?
Remember to be confident when setting your prices. Do not undervalue or reduce your prices with the hopes of selling to more customers. Instead, target the customers who will appreciate the value that you are offering in your products; these are the type of customers you want to keep.
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