How To Set A Price For A Product

As an entrepreneur, setting prices for your products is one of the most critical decisions you will ever have to make. Price affects every aspect of your business, like cash flow, profit margins, and expenses. It is easy to get stuck on the pricing strategy, especially when launching a new product or service.

Price is one of the 4P’s of the marketing mix. Every entrepreneur and marketer must consider the 4P’s when developing a marketing strategy. This article will offer you some tips on how to set a price for a product. We’ll also consider which eCommerce marketing tools are right for you. 

How To Price Your Products

Pricing your products can be as much an art as it is a science. You have to consider several factors. Is your product timeless, tailored, or a short-lived trend? The price you come up with also depends on the profit you wish to make from the product or service. But you need to understand that pricing your products is a continuous process. You have to stay adaptable as the business environment keeps changing. The price you set today might not be the best tomorrow or the day after.

When pricing your product, the most important thing is to ensure that the price will generate the proper income to sustain your business. If your price is unsustainable, it will be tough for you to grow and scale up. Other essential factors to consider when pricing your product include how your price contends with your competitors and what your pricing strategy means for your business and your customer’s expectations.

But before you even worry about these factors or how to find new customers and increase sales, you need to come up with a workable base price. Here are some of the critical steps you need to take when pricing your products.

Add Variable Costs

First, you need to put together all the costs of getting the product out the door. If you are a reseller, these variable costs should be pretty straightforward because you need to calculate the cost of purchasing the product. But if you manufacture your products, you need to factor in the cost of raw materials and production, which should give you a rough idea of your cost of goods sold per item.

Also, consider the amount of time you spend producing the product. So, set an hourly rate and divide it by the number of products you make in an hour. Always incorporate the cost of your time as a variable product cost to make your price sustainable. Some of the main expenses you might incur on your product include the cost of goods sold, production time, packaging, promotional materials, shipping, and affiliate commissions. 

Add Your Profit Margin

No matter the percentage of profit you want to earn on your product, there are several considerations you have to make. For example, you need to remember that you haven’t counted your fixed costs yet. So, aside from the variable costs, there are other significant costs you have to cover. You also should consider the market and ensure that your price falls below the acceptable price even with the profit margin. You will have difficulties selling your product if your price is two times higher than your competitors.

After calculating the price, consider the total variable costs. Divide them by one minus the profit margin, expressed as a decimal. If your profit margin is 20 percent, it should be 0.2, which means that you should divide your variable costs by 0.8, giving you a base price.

Add Fixed Costs

Fixed costs include all the expenses that you must pay no matter how many products you sell. These expenses are an integral part of running a business, and therefore your sales should cover them. Many people who use a per-unit price have difficulties figuring out how their fixed costs will fit in. But there are simple ways to do this. For instance, you can use free online calculator spreadsheets designed to look at fixed costs and variable costs in one place.

Like eCommerce marketing tools help you manage your marketing campaigns, these calculators will show you the number of units of a single product you need to sell to break even at your preferred price. All these steps should help you set the correct prices for your products.