When it comes to pricing your products or services how do you determine what the right price is? There are several different types of pricing models and each has its own set of variables to help you set the right price. How much business you think you can do, how much you would like to make, and what you have to offer competitively will all factor into your pricing formula.
If you manufacture or create your products – cost to produce is a good starting point. Determining the cost of materials and the labor component for each product will give you the bare cost of that product. The cost of producing one product type may be reduced as the number of products produced increases – it may cost you $1.00 to produce product A but when you produce 50 of product A your cost reduces to $.50 each. You cost varies depending on the number of units produced so what is your true cost and where should you price product A?
When your cost varies with the level of production you know your minimum cost and your maximum cost. But which cost is relative to price? Determining your level of sales will help you determine your level of production required and your potential item cost. The way in which you sell your product can also help you decide how to price your products. If you sell product A one at a time and you expect sales to be moderately low your cost will not be your minimum cost so you will have to set the price higher than what you could with a minimum cost. If you sell product A in multiples you can determine your cost based on the sale of multiples and create your pricing for the sale of multiples.
When you start a business or create new products in your business understanding your costs, the price you can set, and your profit will all help to determine whether the venture is worth it or not. If you aren’t sure what price point to set look at your competitor products to give you a starting point for price. With a starting point you can make decisions that will help you cover your costs, provide a profit, and get you into the marketplace.
Once you have your price how will your product get a piece of the market share? You know what price you need but what price will get you going? Having a strategy in place to gain a piece of the market may mean you have to set a lower price to attract attention – penetration pricing. If you have a unique product you may be able to charge a premium – so long as the demand for your product is there. There are several pricing strategies, find one that works for you and determine if your price and your costs will leave you with the profit you need to move forward.