One of the most important choices you'll have to make as a business owner is how to price a product. Almost every aspect of your business is impacted by the pricing strategy you choose.
It also has an impact on your customers. One of the most important aspects influencing a company's pricing decisions is price sensitivity. Customers nowadays are well-informed about the products they buy, and they are price sensitive because they want to get the most value for their time and money.
Small price changes may increase or decrease profitability by 20% to 50%, according to studies.
Because of this, it's all too simple to get stuck on your pricing strategy when you're launching a new business or product, but it's crucial to avoid letting the choice prevent you from launching. Launching and testing with actual customers provide the finest pricing information for business owners. Although market research is important, your pricing ultimately has to be determined by what your customers are prepared to spend.
Having said that, picking a pricing scheme may be challenging. That's why we wrote this manual, which not only explains how to price a product in detail but also discusses key elements of a successful pricing strategy and the most often used pricing models in today's business.
Do you need a good pricing strategy for your business? You must first calculate your markups and profit margins. To establish a viable selling price for your product, use Shopify's profit margin calculator.
What is product pricing?
The process of figuring out a product's quantitative worth based on both internal and external elements are called product pricing. Product pricing directly affects your business's overall profitability, including cash flow, profit margins, and client demand. Pricing methods vary depending on the business, the target market, and even the cost of the items. Subscription-based pricing schemes, for instance, are widespread in e-commerce. Competitive pricing is often the best course of action in increasingly cutthroat marketplaces.
How should I price my products?
There is no lack of guidance on product pricing. Some of the advice is excellent, while other advice isn't so wonderful. Fortunately, pricing products successfully is a straightforward process. You may come up with a pricing strategy and ultimate price that works for you by doing in-depth market research and knowing your target customers.
Pricing affects everything from your business's finances to where your product is positioned in the market, taking into account things like whether it's a classic, made-to-product, or fad. It also affects your ability to turn a profit while using online marketplaces. You must make this important strategic choice for your business, and it may include both art and science.
However, you don't just get to make this choice once.
There is a reasonably fast and simple method to establish a beginning price if you're seeking to determine the retail price of your product.
To determine your first price, add up all the expenses related to bringing your product to market, then add your profit margin on top of those costs. One of the simplest methods for setting the price of your product is this strategy, which is known as cost-plus pricing.
You're partially correct if you think it's too easy to use to be useful, but this is how it functions.
Pricing isn’t a decision you only get to make once.
Your pricing strategy must support your business, which is its most crucial component. Your asking price must enable you to remain in business.
Why this pricing model works
You will lose market share if you price your products expensive and few customers purchase them. If you set your prices too low, you'll either be losing money or making an unprofitable profit. This makes scaling up growth difficult. Of course, there are situations when it may make sense to offer a certain product for less price if you discover that doing so enhances the lifetime value of your customers, but this should always be done carefully.
Other crucial aspects of pricing, such as how your prices compare to those of your rivals, consumer trends, and the implications of various pricing methods for your business and your client's expectations, must also be taken into consideration. You may also ask your current customers if they think you should increase prices. You may begin experimenting with a higher price on a small subset of your current customers to see how they respond.
There are a few other crucial factors to take into account, however, before you can worry about deciding on the selling price for your product.
How to price your product
The process of calculating a sustainable price for your product consists of three simple steps.
1. Add up your variable costs (per product)
Understanding your costs is key to developing a pricing strategy that works. When you order goods, you can easily determine your cost of goods sold, or how much each unit costs you.
If you make your own products, you'll need to look more closely at a variety of your overhead, labor, and raw material costs. What is the cost of that bundle and how many products can you make with it? You will then have a ballpark figure for your cost of goods sold per item.
Don't overlook the value of the time you invest in your business, though. Divide the number of products you can produce in that amount of time by the hourly rate you want to make from your business. This is how you should price your time. Make sure to include the cost of your time as a variable product cost when setting a price to ensure that it is sustainable.
The final price you decide on should be the amount your target customers will consistently pay. Market research is crucial to your next move. Before rushing to your rivals, it's critical to understand how much your customers are willing to pay.
|Cost of goods sold||$3.25|
|Total per-product cost||$14.28|
In this example, your total per-product cost is $14.28.
2. Consider your profit margin
It's time to include profit into your price after you have a total for your variable costs per product sold.
Suppose you want to cover your variable costs as well as a 20% profit margin on your products. It's crucial to keep in mind two considerations while selecting this percentage:
- You still have costs to pay in addition to your variable costs since you haven't yet included them in your fixed costs.
- Make sure your price range still fits within the general “allowed” price for your market by taking the broader market into account. Depending on your product category, you may discover that sales are difficult if your price is double that of all of your rivals.
When you're ready to determine a price, subtract the desired profit margin in decimal form from your total variable costs and divide the result by 1. You would divide your variable costs by 0.8 if your profit margin was 20%, which is 0.2.
This provides you a basic price for your product in this instance of $17.85, which you may round up to $18.
Target price = (Variable cost per product) / (1 – your desired profit margin as a decimal)
3. Don’t forget about fixed costs
Variable costs aren’t your only costs.
The expenditures that you would pay whether you sold 10 products or 1,000 products are known as fixed costs. They play a crucial role in operating your business, and it's ideal if your product sales can also cover them.
It might be difficult to determine how your fixed costs fit into a per-unit price, which is why experimenting with multiple price points is crucial.
Using the data you've previously acquired on variable costs to populate the break-even calculator worksheet is an easy method to go about this. To save a copy of the spreadsheet that only you can change, choose File > Make a copy.
It is designed to look at your fixed costs and your variable costs in one location and to determine how many units of a single product you would need to sell to break even at the price you have set.
Making an educated choice about how to strike a balance between paying for your fixed costs and establishing a sustainable and competitive price may be aided by these calculations.
Learn how to run a break-even analysis, what to look out for, how to evaluate your results, and how to make adjustments depending on them.
Using a product pricing calculator
Use a product pricing calculator to discover a competitive selling price for your products. This will make life simpler and will allow you to evaluate how various price points may impact your business.
An excellent tool for calculating this is Shopify's profit margin calculator. It employs a cost-plus pricing strategy, which calculates the ultimate selling price by first adding a percentage markup to the total costs associated with producing your product.
Simply input the gross cost of each item and the desired profit margin on each transaction to get started. Consider that placing your item on the shelf costs $20, and you want to increase the price by 25%.
Click “Calculate Profit” after your numbers have been entered. To determine the ultimate price you should charge your customers, the tool will put those numbers through its profit margin calculation. The sale price is $25, your profit is $5, and the gross margin is 20% as you can see in the example below.
Play with the numbers to determine the ideal price point for your clientele and revenue. Increase your markup if you can demand a higher price. From there, you can establish prices and begin making money from each sale.
Test different pricing strategies
Do not delay launching your store out of concern that you will choose the “wrong” price. Pricing choices will constantly change as your business does, but as long as your price generates a profit and covers your costs, you may test and tweak as you go. To check how your methods compare to those of comparable products, do a price comparison.
Value-based pricing is a prevalent pricing approach, especially in e-commerce. Based on the perceived value of the products and services you provide, you set the price for your products when using value-based pricing.
Are you unsure of the kind of promotional materials your products could require? One of the most typical ones in an e-ecommerce setting is promotional materials or extra gifts to elevate your e-ecommerce packing and unboxing experience.
By using this strategy, you may set a price with confidence since, when it comes to pricing, the most crucial factor is making sure your pricing enables you to develop a sustainable business. Once you have it, you can launch your store or your new product, provide discounts and decrease prices, and use the information you get from customers to modify your pricing structure in the future.
Product pricing FAQ
When choosing your product's price, there are several alternative pricing tactics to take into account. You must consider your cost of goods, profit margins, and pricing costs used by your rivals. It takes effort and a lot of elimination to get your pricing just right.
For a product that costs $10 to make, $20 would be a decent sales price if the typical gross profit margin is about 50%.
Using a product pricing calculator makes it straightforward to determine the product's price automatically. You'll need to put your variable costs and fixed costs together to do a manual calculation. The target market price is then obtained by adding a profit margin.
1. Market demand
2. Competitors’ pricing
3. The value of your product
4. Target customers spending power
5. The total costs of running your business including fixed and variable costs