One of the challenges to running a successful business is pricing your products properly. Having the right price point can enhance how much you sell therefore creating the foundation of a profitable business. On the other hand, having the wrong price point can create problems that your business will never survive.
I wish I could tell you that there was a magic formula for setting prices, but I can’t. It’s going to take a little research and some careful planning.
Start at the Beginning
The first step in determining the right price point starts with an examination of costs. You will want to determine the cost of the individual product as well as the overall costs of running your business. For example if I was retailing tee shirts I buy my shirts for $1.00 and can’t simply give it a mark up of 33% because in order to sell my tee shirts I have to advertise, pay rent, pay electricity, hire staff, have a web site, a phone, internet connection and so on. You must factor in the costs of doing business as well as make a profit. You can easily do some research to help you determine the margins for your business. Different industries and business models, (ie. direct to consumer, manufacturing, retailer with a store front, retailer online, or wholesale ect.) will have different margins. Knowing these margins will help you determine your price.
If my expenses are $200.00 and I sell 100 tee shirts at $1.33 for total sales of $133.00 my business is going to go into the red pretty quickly. I have to sell my tee shirts for at least $2.00 a piece to break even and more than $2.00 a piece to make a profit. Knowing your base cost is just the starting point for determining your price point.
Pinpoint Your Target Customer
Knowing who you are going to be selling to will also help in determining your price point. Remember every business has a target market; make sure you define yours before setting your prices. Pricing properly for your target market is a key ingredient to setting the proper price. Without undergoing huge amounts of research you can break your target market down into three categories: the budget sensitive consumer, the moderate consumer, and the status centered consumer.
If I am marketing my tee shirts to the budget sensitive I may price my tee shirts at $4.00 each however if I was targeting the status centered I may price my tee shirts at $8.00 each. So now I am selling the exact same tee shirt, but I have two very different price points. Why do we charge more when we’re targeting the status centered consumer? Well it’s a perception thing. If a status centered consumer saw the exact same tee shirt on the rack for $4.00 they are going to think it is cheap therefore poorly made. While the budget sensitive consumer will see the tee shirt for $8.00 and think that it is too expensive, why would they pay $8.00 when they can get something for $4.00?
You can’t target both of these markets, so pick your market and set your price point and business model accordingly.
Know What Your Competitors are Charging
Knowing what your competitors are charging can be a great way to see where your prices line up. After all your customers will know what your competitors are charging. Be careful when doing this to ensure that you are comparing products that are comparable to yours. Also keep in mind that just because your competitors are charging a certain price doesn’t mean that that’s the price you should be charging. Use your competitors price as an indicator, but don’t put too much importance on this factor. You need to have a stong understanding of your own business model. If a competitor is under or over pricing they may not have a sustainable business model which is a road you don’t want to follow them down.
If I am selling my tee shirts for $8.00 each and my competition is selling them for $12.00 each I may be under pricing my product. Some business people may think, “Great! I’ll sell more because I’m cheaper.” Actually, not only have you left money on table, you’ve changed the perception of value of your product. Which means you’ve fundamentally changed your product.
By going through these steps you’ll be able to determine the proper price for you product. Unfortunately, having the proper price does not guarantee sales. It is your ability to sell the product, not the price of the product, that drives sales. If your sales are not great, but your product is at the right price point you may want to investigate your sales method, which is another topic all together.