Deciding on a price tag for your product is one of the most significant decisions you may make as a business owner. The price impacts all other aspects and is a deciding factor in profit margins, expenses you can cover, and cash flow. Price sensitivity shows that customers are well-informed and want to ensure they get the most for their time and money. Here are four tips for deciding your products’ prices.
- Know the market
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When you design a product, you first need to know what your customers are looking for, what your competitors offer, and how much your competitors charge for a similar product. It’s not enough to simply beat or even match the competition because if you’re trying to offer a bargain product, you would need to be at the low end, but if you have a high-quality product, that may mean reducing your potential profit.
Your pricing also sends a silent signal to potential customers, with a low price suggesting low-quality, while higher prices reflect higher quality. Gather as much data to examine as possible about your customers and competitors when you sit down to determine your products’ prices.
- Know your costs
Your product price needs to, at a minimum, cover all of your costs, both indirect and direct. Direct costs include raw materials, energy used in the production process, manufacturing costs, packaging, and distribution. Indirect costs are usually fixed and include the money spent in the development phase, employee costs, and general overhead, like rent and electricity. Each of your products sold will cover some of these expenses, so the more you sell, the higher your profit margin.
- Know your objectives
You should determine what you want your pricing to achieve. If you are trying to build market share, you may want to set a lower price. Or, you may want to set a higher price to get customers to pay more to get their hands on a new and exclusive product. When you sell several different products, you may want your pricing to be consistent. You could also have one set of prices for your base products and another for a premium range. A data-driven pricing strategy can help you decide on the best price for your products. Business leaders can broaden their knowledge by enrolling in an online course covering the use of data to improve pricing performance.
- Know pricing methods
Several different pricing strategies are designed to help you set a product’s price, including:
- Cost-plus pricing. Find the percentage of your fixed costs the product must cover. Add those costs together and divide by volume to create a per-unit break-even point. From there, you add a mark-up or margin to the break-even point to come up with a price. Cost-plus pricing works on the idea that you will sell out, and if you do not, that means a lower overall profit.
- Value-based pricing. This approach considers how much the customer is willing to pay for your product. A perceived value then determines the price. Comparing your product to that of a competitor can give you an idea of your product’s value. Consider features, service levels, guarantees, quality, brand recognition, and reputation. You can also ask existing customers what they believe the value to be.
Product pricing does not stay fixed over time. You can keep an eye on what is going on with your product, talk to your customers, and study the competition to shift prices as needed.