Many people think this would be the easiest part of any business, but a lot goes into figuring what you should charge for your product. There are many methods to figure out how to price your products, but there is one big thing you need to consider first: How well known are you?
Rolex can ask for a high price for their watches because they are known world-wide for their watches. But if you are just starting to make watches, and even if the watches you are producing are better than Rolex!, you do not have the name to back your product. So you can’t ask Rolex prices. Over-pricing your products can be a problem as it will lead to fewer sales. But under-pricing products can be damaging too. When you are determining how to price your products, you do not want to set your prices just above cost. You won’t be making enough of a profit to grow and you will be sending a signal that your product is not high value. There was an interesting article about a $365 foam roller in the New York Times recently that touched on both sides of this issue. In order to strike that value, you need to consider the market, your customer and your costs. Our checklist will help you do those things and we’ve included a handy recommended markup table too.
Let's go through a few questions you should consider when deciding how to price your product:
What is your competition charging?
- If you are getting into a field where you will have competitors, check them out, closely! What are they selling products for? Who are they selling their products to? The more you know about what their charging, why and who is biting, the better equipped you will be to price your own product. Explore their website, consumer reviews and social media.
Who are your customers?
- If your customer base are high school/university students, then having a product with a high price tag may not be the best idea, because the market will not be able to bear the cost you set. Scale down and be as competitive as possible but consider how you can remove some of the extras that your target market won’t appreciate.
- If you are catering to an affluent crowd, a super low price point can be a deterrent. Scale up and make sure you match your vision of your product and customer base with your marketing.
- If you are not sure about your customer base, you should lay that ground work before pricing your products.
What are your costs?
- Do not just think about the cost of the components, but the cost to you to bring the final product to market when you are determining how to price your products.
- For e-commerce shops you must consider shipping and the time it takes to pack and ship direct to consumers. If you are stocking your product at physical retailers, consider the costs associated with doing so. They add up quickly and should be considered.
- If you are building it, include the cost of time, utilities and other necessities.
When you set your price, you will want to make sure that you cover your cost, including paying employees and taxes, utilities for the store, etc. The markup you should add to your product should be adjusted based on the considerations we mentioned in the first half of this article, but we can give you some ideas based on what other businesses do as a jumping off point.
Recommended MarkupsClothing: 100-350%
Cell Phones: 8-10%
These are not set in stone, some companies will set a far lower markup and will see more business and will still make a profit. And, there is not a standard markup for digital items, because the exact cost of a digital item is more difficult to calculate.
Finally, let's talk about changing your prices. If you already have your store setup and prices for your products, but you need to take into account changes in your cost, proceed with caution.
Do not raise your prices by a large amount quickly.
- I've seen sales suffer at a coffeehouse when prices for a drink jumped from $2.25 to $3.50. That’s not a huge jump - and it’s still under Starbucks prices! - but the clientele reaction was shock and anger.
- You can’t just consider your costs. You have to consider your clientele. Few customers are empathetic enough to listen to your explanation. All they see is more money leaving their pocket.
- You can have a big increase to your price, but you need to take time to reach that. Plan to increase the price slowly over time. If this coffee spot had anticipated their customers’ reactions, they would have raised the prices by 10 cents to start and gauged reactions.
Avoid dropping your prices by a large amount.
- Let's say you had a product that cost you $1.50 to bring to market, and you were charging $2.00. Then suddenly changes cause the cost to you to only be $0.35. You do not want to just drop your price to even $1.00. There are a few reasons for this:
- If the prices goes back up to $1.50, you would then have to double your price to keep ahead.
- If the price drops suddenly your customers may assume that there is a problem with your product.
- You can use this sudden savings to you to offer a special and increase advertising to bring new people in. Then you can increase the product price back up near previous levels.
So have you done your research? Are you ready to place a price tag on your products? Get out there and do it! And tweet us how it’s going. Good luck and good sales!