Pricing your product is a decision that requires immense precision as it affects every business decision of yours down the line. How you are going to price your product determines the profit that you will receive, the expense that you will bear, and your cash flow.
That being the reason, it becomes vital to price your product the right way. However, in order to gauge audience response to the price, you need to launch your product in the market. But before doing that, you need to make sure whether you are pricing your product the right way or not?
So to help you price your product effectively, we have gathered some information that will help you in your business growth in the longer run. Now without further ado, let us get straight into it!
What Should You Keep In Mind While Pricing Your Product?
Setting the price of your product is not a decision for eternity. Instead, you can change the price of your product at a later time according to consumer behavior. So if you are stuck and do not know how to begin(price your product), you are at the right place. Read on!
There are three things that you must take into consideration while pricing your product. Here are those three things:
- Add up your variable cost per product
- Add a profit margin
- Do not overlook fixed costs
Add Up Your Variable Costs Per Product
While pricing your product, an essential thing that you need to do is make a list of all the costs that are involved in manufacturing, shipping, and selling the product.
If you do not manufacture the product you sell, the process will be pretty straightforward for you. All you need to do is to calculate how much it costs you to buy a single unit of the product from the original manufacturer. In this way, you can easily determine your cost of goods sold.
However, if you are also the manufacturer of the product that you sell, you will need to dive a bit deeper and consider several types of costs involved in the process.
You will need to calculate the cost of raw materials. Moreover, you will need to analyze how many products you can make from the raw materials you have in hand. This will aid you in estimating the cost of your goods sold.
Now to understand variable costs, let us walk you through an example.
Suppose you are selling a product, and you need to make sure what your cost per product will be. Now, look at the costs we have listed below that you might incur per unit.
- Cost Per Unit Sold $2.5
- Manufacturing Time $1.5
- Packaging $1.25
- Marketing $0.5
- Transportation/Shipping $3.5
So, by looking at this example, the total cost per unit product is $9.25.
Do Not Forget To Add A Profit Margin
If you are done with calculating your total variable cost per product, then the next thing you should proceed to is profit. It is the stage where you need to build profit into your price.
Let us consider that you are planning to gain a 30% profit on products. When you are planning to earn a profit, you should keep these things in mind:
- You only have added variable costs yet, so you will also need to include fixed costs too.
- You have to conduct market research to find out that the profit margin you are keeping at this price is acceptable according to the market price or not. If your prices are relatively higher than your competitors, let us say 3x times higher, then selling your product might become challenging.
So in order to calculate your target price, you need to divide your variable cost by one subtracted by the profit margin in decimal. For instance, if your profit margin is 30%, it must be converted to decimal, and after converting, it will become 0.3. In short, you will be dividing your variable cost by 0.7 in this scenario.
To put it into perspective, let us do the math.
The variable cost that we calculated earlier was $9.25.
Now let us calculate the target price.
Target Price = (Variable cost per product) / (1 – your desired profit margin as a decimal)
- Variable cost per product = $9.25
- Desired profit margin expressed in decimal = 0.3
Target Price = 9.25 / ( 1 – 0.3 ) = 9.25 / 0.7 = $13.21
So the Target Price will be $13.21.
Do Not Overlook Fixed Costs
Variable costs are not the only costs that play a significant role in the pricing of your product. Including fixed costs while deciding the price of your product is also a must.
Fixed costs are basically the costs that you need to pay in any condition. They are the expenses that stay basically the same despite your increased sales. It means that whether you sell 5 or 500 products, your fixed costs will remain the same.
As fixed costs are an integral part of your business, your aim should be to cover them by selling your products.
Some examples of fixed costs are:
- Rental expense
- Insurance expense
- Property Taxes
- Interest expense
- Depreciation expense
- Utility expense
- Equipment expense
Test The Price Of Your Product By Launching It In The Market
Launching your product may not be an easy decision for you. But make sure not to let the fear of choosing the wrong price hold you back.
The price of your product is meant to evolve with time and your business. And if your price is covering your expenses and providing you with some profit, you are good to test it in the market.
Following this, you will be able to determine how customers are responding to your price and will be able to make changes in the price accordingly. Once you understand what price to go with, it can make your business grow substantially.
When it comes to the success of your business, pricing plays an important role. In order to price your product effectively, you need to add up your variable costs, set up your target price, and foremostly keep your expenses in mind.
If you succeed in making a profit out of your target price, it means you are headed in the right direction. If not, you probably need to revise your price to make it suitable for both consumers and your business.
We hope that this blog has taught you the basics of pricing your product. If you are interested in reading more, check this blog out: