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Business Basics: How do I price Products?

One of the secrets to business success is pricing your products properly. Price your products correctly and that can enhance how much you sell, creating the foundation for a business that will prosper. Get your pricing strategy wrong and you may create problems that your business may never be able to overcome.

One size does not fit all. You can only go so far pricing all your products based on a fixed markup from cost. Your product price should vary depending on a number of factors including:

· What the market is willing to pay.

· How your company and product are perceived in the market.

· What your competitors charge.

· Whether the product is "highly visible" and frequently shopped and compared.

· The estimated volume of product you can sell.


Know Your Costs

A fundamental tenet of pricing is that you need to cover your costs and then factor in a profit. That means you have to know how much your product costs. You also have to understand how much you need to mark up the product and how many you need to sell to turn a profit.

Remember that the cost of a product also includes overhead costs. Overhead costs may include fixed costs like rent and variable costs like shipping or stocking fees. You must include these costs in your estimate of the real cost of your product.

Pro Tip - Come up with X first. X is your cost of raw materials, labour, rent, and everything it took to make the product so that if you sold it you would break even. Y becomes what you think you need to make on it. That may depend on your business.

Many businesses either don't factor in all their costs and under-price or literally factor in all their costs and expect to make a profit with one product and therefore overcharge. A good rule of thumb is to make a spread sheet of all the costs you need to cover every month, which might include the following:

  • Your actual product costs, including labour and the costs of marketing and selling those products.

  • All of the operating expenses necessary to own and operate the business.

  • The costs associated with borrowing money (debt service costs).

  • Your salary as the owner and/or manager of the business.

  • A return on the capital you and any other owners or shareholders have invested.

  • Capital for future expansion and replacement of fixed assets as they age.

Pro tip: Have a budget action plan in place. Try to have a plan for your pricing that extends out three to six months in the future.

Keep an eye on the competition

It's also helpful to look at the competition -- after all, your customer most likely will, too.

Are the products offered comparable to yours? If so, you can use their pricing as an initial gauge. Then, look to see whether there is additional value in your product; do you, for example offer additional service with your product or is your good of perceived higher quality? If so, you may be able to support a higher price.

Know Where the Market Is Headed

Keep track of outside factors that will impact the demand for your product in the future. These factors can range from something as simple as long-term weather patterns to laws that may impact future sales of your products.

Who are your customers?

Are you selling direct to customer or wholesale or both? If it's just one - do you plan to do both in the future?

If you are selling wholesale, or plan to in the future, then you need to factor this into your pricing model now - when you sell wholesale you have to build from your cost, to your selling price to the wholesalers selling price and you need to ensure that the profit and margin is correct at each step.

Pro Tip: Listen to your customers. Try to do this on a regular basis by getting feedback from customers about your pricing. Let them know you care about what they think.

You owe it to yourself and to your business to be relentless in managing your product pricing. Remember, how you set the price of the products could be the difference between the success -- or failure -- of your business.


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