There are many things you need to consider when running a business. One of the most important is how you plan to make a profit.
After you figure out important marketing strategies, you’ll need to focus on how to price your products. This aspect can be extremely tricky. You want to make sure that things aren’t too low or high. You also need to use it to stand out from your competition. But how exactly can you tell if your cost is ideal?
This post will explore a few reasons why taking the time to find the best price is critical. You’ll also find a useful product pricing guide to refer to.
Why It’s Important to Focus on Pricing
Product prices play a major role in your success. To begin with, they’re what help you make a profit. You need to set things at a specific price that ensures you stay in business.
But another thing that might surprise some is that the price shows value. If you display something at a very cheap price, it could turn some away. While you might think you’re giving a good deal, some might think it’s not of quality because of that.
Elements to Consider When Picking a Price
You should research a few factors before you set a price.
One of the first things to check is how much your competition is pricing things. To begin with, research how much they’re selling items for. Do they all seem to follow an average price range?
Sometimes brands use a tactic known as the loss leader strategy. This prices an item at a fee well below the competition with the hope that customers will buy other things to make up for it. However, this might not always be the ideal option. This is especially so if you’re a small business and need that profit.
In the end, you’ll need to figure out whether to price it below, at the same level, or slightly above your competition. If you do pick the same price or above, make sure to advertise why customers should consider buying that product from you over them.
If you’re having a tough time tracking competitor prices, use a price monitoring tool. This will scan competitor sites and online profiles to keep track of their offerings. It will then compile detailed insights into buying trends.
You’ll want to use this tool often so you stay on top of the market. It can also help you quickly re-price things should you notice buying habits increasing or decreasing.
If you pay for labor or materials to make the product, you need to work this into the price. Otherwise, you won’t make much of a profit.
Known as cost-plus pricing, it revolves the price around labor and materials. For instance, if labor costs were $50 and materials cost $20, you need to make sure you’re pricing over $70. You can then add the ideal profit margin you’d like to this. Doing so ensures that you afford the product’s costs while making a good profit.
As previously mentioned, value is important for many customers. Many are willing to pay extra if they feel you’re a serious brand that offers high-quality goods.
This can eventually be a major benefit because it could lead to you making a larger profit. While you shouldn’t excessively mark up things, you can slightly increase the margin. This can help you make more money.
But if you do this, make sure to keep up with the value. You don’t want to start with something nice only to have the quality decline. This can cause people to lose trust in your brand and look elsewhere.
Another element to remember is your time. You need to incorporate this into the costs. Otherwise, you’ll basically be working for free.
To find the right price for your time, set an hourly rate you desire. Then take this and divide it by the number of products that will be made during the time. This will show whether it’s a fair price.
Product Pricing Guide: How to Pick the Best Cost
There’s a helpful formula you can use to find the right product pricing. To begin, add up your variable and fixed costs.
You then want to combine these total costs and divide them by your profit margin. If you’re not sure what an ideal profit margin is, take your net income and divide it by your revenue. You then take this number and multiply it by 100. Once you do this, you’ll get a fair profit margin to add to the overall costs.
So, say your total costs were $150 and your profit margin is 20%. This would come to $30 you add on top of the total costs making the product worth $180.
3 Ways to Test Your Product Price
1. Pick Price Points
Price points focus on various potential prices that a product can be sold at. This tries to find the right one that customers are willing to invest in while being productive for your brand.
To find price points, first refer to your cost-plus pricing and competition metrics. Find the average between these two and pick about two prices that might work.
When you figure out these two options, run an A/B price test. This requires you to price similar but different items at two separate costs. For instance, if you sell artisan olive oil, select two choices and price each with one of your price points.
You can then monitor the results. Do you find customers picking one over the other? If so, that particular price point is likely the best to use.
2. Do Direct Research
If you want quick answers, conduct direct research. With this, you’ll see if potential consumers feel that the prices are fair.
Some things to ask during it are:
- Do you think this price reflects value?
- Would you be willing to spend this amount on the product?
- How much higher do you think the price could go?
Use this information to then base your prices. Over time, you might also want to do review meetings. You can bring back the same groups with some new members and see if they still feel the same. It’s crucial to be active in this because their insight is what will help you better understand your target base.
3. Try Price Laddering
This is somewhat similar to price points, but there’s a catch. You’ll take your desired price points and see if the space between is too much or too little.
To use this method, ask customers to look at the price points. Ask them if they will buy your particular product for that amount. If they bought it, you found the right price. However, if not, slowly lower the price until they agree.
Continue this process with multiple people to get a general idea of things. You can figure out whether their insight is the best way to sell your item.
Finding the best product price can be tricky. You don’t want to deter customers, but you also need to make a decent profit. With this information, you’ll hopefully be able to discover the best ways to sell your items.
For more information, please refer to the following pages:
- Top Factors to Consider When Pricing Products
- Guide for Value-Based Pricing
- What Is Competitor-Based Pricing?
- What Is Cost-Plus Pricing?
- All About Dynamic Product Pricing
- Tips for Incorporating Different Pricing Methods
- How to Know You Should Change Your Product’s Price
- How to Price Your Product Perfectly