The first step to having something to sell is creating your product. However, after spending hours developing a product, many entrepreneurs know little about how to price products.
They may know what they want to charge, but have no idea what price buyers are willing to pay.
Once we’ve covered the mechanics of how to price products, keep reading to learn how your business goals impact both pricing and profits.
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How to price products in 5 easy steps
Let's look at the steps on how to price products. You can use these to better guide your business decisions, in an effort to boost your profits.
Step 1: What are your direct costs?
When looking at how to price products, the first step is asking yourself:
- What are the direct costs of the product?
- What are the materials required to make your product?
Asking these questions will help you better determine how to calculate variable cost per unit (details on how to make the calculation here).
When my wife started selling masks over the last few months, she forgot to account for the thread she was using in addition to the fabric she purchased.
She also forgot to account for the time that she was putting into making the masks.
Far too many people don’t know how to calculate variable cost per unit. They also tend to forget about their supply costs and the value of their time (aka labor).
If you have any employees, you must also account for all the costs they incur. Some examples include:
- Time on a sales floor
If you have machines required to manufacture your products, you must also look at the costs required to keep them in good running shape. For my wife that was $1 out of each mask so she could send her sewing machines in for a service in the year.
Forgetting to account for these extra costs can mean that your "profitable" product is a big money loser.
Step 2: What is the standard markup for your industry?
Once you’ve added up your manufacturing expenses, you should have a clear idea of the markup for your industry. This will help you determine how to price products effectively.
Many retail shops simply mark up their products around 30% above their purchase price. Other industries may use 20% or 50% — it's important to understand what the standard is in your industry.
If you're just breaking into a field, then look at trade publications for your industry for information. You may even be able to contact the retailer association for your province and get advice on what the markup is for your industry.
Step 3: What will the market bear?
Now it's time to look at what the market will bear in your location. While the standard industry markup may be a good starting point, you may look at the price and realize that it will only work for people who have an established brand or in an urban centre while your customers are in a more rural setting.
There is a maximum price that the people you can reach will pay.
You must take this into account when deciding how to price products.
Step 4: What are your competitors charging?
This is where you can take a look at your unique selling proposition.
If you're an early-stage business wondering how to price products, then you may charge less. This often happens if you don't have a large factory floor or are working out of a garage. My wife and I just experienced this when purchasing a coffee table from Onion Mountain Woodworking.
After talking to more established custom furniture makers in Chilliwack, we reached out to Onion Mountain and found their pricing more competitive for the product we received. As a younger business, their service was also much better than established local players.
If you're starting, you may need to offer a lower price to compete with other established businesses. Then as your experience grows you can raise your prices as you become the established competitor.
Step 5: Revisit your pricing regularly
The final step in any guide on how to price products is revisiting your pricing regularly. At the very least, take a look at your pricing every year.
As I've said, when you become an established business you can look at raising your prices because you have more rent to pay or more employees to take care of and the cost of production is increased.
For a smaller manufacturing-based business if you're busy, raise your prices a bit to push some of the demand down and keep up with your work. I do this regularly with my services.
If I'm swamped, I may charge two or three times my regular rates because that's how much I want to earn to fit in some work for someone on a weekend.
I've also found with every venture I've done that raising prices often increase the quality of the clients you get. Instead of the ones that nitpick every detail at lower prices, you get customers that respect your work as a professional and are willing to trust you.
Is your venture a hobby or a business?
If you find that your business profits are inconsistent (or not always in the green), you may be focusing too much on the hobby and not enough on the business. Anything less than continued profit in the accounts of your business will probably not lead to long-term success.
Channel your inner salesperson
Second, pricing is not what drives sales. Your ability to sell will drive the sales.
The ability to sell comes with experience, your confidence in what you're selling and any unique selling proposition you have.
Sometimes your unique selling proposition can be your high price because you're providing a premium product. Depending on your product and your target audience, this can work.
Establish your overall goals for your business
When I started my own business, my goal was to make it last until next month. I took on lots of work at prices I chuckle at now, but I wanted to make sales and had no recognition for my business.
After over a decade in business, I charge so that when I want to take a day off with my kids I can do it without worrying about lost income time. Be clear with yourself what type of business you want to be running. Lifestyle businesses require different prices than a business that is trying to maximize revenue at the expense of time put into products.
Final notes on how to calculate variable cost per unit
If you can't charge enough to make a product, then you’re emphasizing too much on the hobby.
You must charge more than your cost of production and you need to take into account all the costs you incur.
It’s also important to take into account the stage your business is in. When you're starting, you will likely have lower prices to help fill your sales pipeline faster. As your business grows, your prices will likely have to go up to accommodate new expenses.
When looking at how to price products, make sure you have a plan to look at your pricing strategy at least yearly. This will allow you to appropriately charge for your products. Remember, pricing doesn't have to be hard. It just takes a bit of thought and planning to do it properly.