To determine your product’s best-selling price, you need to consider several things, like the cost of production, market demand, and competition.
Several pricing strategies are available for you to use.
Some you can implement immediately, others require time, research, and marketing dedication.
All are in today’s post.
Together, we’ll unravel the science behind product pricing so you earn a profit and beat your competitors.
Product pricing involves calculating the costs of producing and selling your product at a price your target audience will pay while earning the profit you need to run and grow your business.
For that, you need a pricing strategy.
A pricing strategy is a method for determining a product price that maximizes your profits while considering your target audience and market demand.
A pricing strategy sets a competitive price by evaluating your production costs, analyzing customer needs and demands, competitor pricing, economic and market trends, brand positioning, marketing objectives, and revenue goals.
When starting a business, many entrepreneurs price their products by calculating their Cost Of Goods Sold (more on that later), researching their competitor’s rates, and selling for something similar.
While those are important, if you only account for your COGS and your competitors, you might leave a ton of profit on the table or not sell a stitch.
You need the right pricing strategy to maximize your revenue/profits while creating a perceived product value that resonates with your target audience’s needs.
Because when you have that, your products and price will sell for you.
But before we look at pricing strategies, you must know how to price your product.
So, let’s begin there.
Product pricing, unlike a pricing strategy, is a one-size-fits-all formula.
While you can and should play with pricing strategies to determine the perfect price for your goods, finding a profitable product price remains the same.
It’s a simple 4 step process that always starts with your costs:
Before you can price a product (and depending on whether you manufacture or re-sell), you must know all the costs associated with manufacturing and buying/selling them to understand how much revenue they must generate to ensure you run a profitable business.
Costs fall into 2 categories: fixed and cost of goods sold (COGS).
COGS includes every cost of manufacturing or buying and re-selling ready-made products. Those vary depending on what type of seller you are, for example:
While COGS are generally considered variable costs, they can include fixed costs. You need to know those to determine your sales price and profit margin, and we’ll look at those in a moment, but first:
Variable costs (also called direct costs) increase relative to your product production or sales. I.E., the more you sell/produce, the more you spend.
Variable costs examples can include:
Also called indirect costs, your fixed costs are not directly associated with your product and are the same no matter how many you produce or sell.
Having a handle on your fixed costs is essential, as these often account for most of your business expenses.
Fixed cost examples include:
Of course, every business experiences different direct and indirect costs.
However, besides your product’s fixed and variable costs, 3 other elements play a vital role in how to price your products and choosing a pricing strategy that suits your niche:
Once you’ve totaled your variable (costs per product sold) and fixed costs (those for running your business), you can add profit to your price.
Adding profit is more than a random $ figure; you must consider your niche to ensure your price is acceptable for your market.
Pro tip:
The non-profit organization Risk Management Associates provides financial health reports on SMBs in most industries where you can find your market/product average sale price.
Okay, back to your profit.
In retail, we express profit as your gross and net margin; here’s how they work:
Your GPM is the percentage of your product sales price exceeding its COGS.
It’s how you determine whether your chosen price is within a reasonable range for your market, and it helps you price consistently during manufacturing or wholesale price fluctuations.
Use the formula below to calculate your gross profit margin:
For example, say you sell pillows; you buy them for $6 per unit and sell them for $12.
Your gross profit margin on each pillow is:
But your GPM doesn’t tell the whole financial story; for that, you need your net profit.
Your NPM shows your total profitability, accounting for COGS, including fixed and variable; It shows your profit as a percentage of your total revenue.
You use your net profit margin to calculate your business bottom line after you deduct all the extra expenses.
Use the formula below to calculate your NPM:
For example, let’s say your pillow store has an annual sales revenue of $36,000 for the month. Each month, your fixed costs are $13,000, and the COGS for the items sold was $19,000.
Finances, however, aren’t the only variables at play when pricing your product.
You must also account for the human factor!
To set the right product price for your target audience, you must first identify and understand their needs and then promote the value your product offers them.
Your goal here is to identify a lucrative profit margin and discover which consumer demographic (type of people) wants your products.
Every target audience is a specific society demographic defined by age, gender, education, employment, income, location, etc. Each demographic has its buying parameters regarding how much they’ll pay for a product.
Thus, when you understand your target audience, you’ll know where to market your products and, more importantly, what to charge.
You must know your competitor’s basic price structure and strategies to compete at any level, especially on price. In other words, how low and how high they can go.
Both price points apply to your product price strategy as they show your competitor’s net product price and whether you can match or beat their lowest price.
But it also tells you how established they are in your niche.
For example:
In markets with multiple established brands that consumers know and love, selling cheap won’t work.
However, you could use the value-based pricing strategy, beating your competitors by providing a better product.
But to do that, you first need your USP (unique selling point), sometimes called your UVP (unique value proposition).
Regarding pricing strategies, that’s your last step when pricing your product.
You’ve 8 pricing strategies available when launching a new product or entering a new sales platform. All have pros and cons and suit specific types of businesses at different stages of development.
Let’s begin with the easiest:
Cost-plus pricing (also called Mark-up) is the most popular way to price your product because it’s easy, but that doesn’t mean it’s the best.
Here’s how it works:
Many retailers double the wholesale price; this is called key-stone pricing:
Cost-plus pricing offers a profit margin but has limitations as it doesn’t account for market factors like competition or product demand, resulting in over or undercharging.
Also known as competitor-based pricing, market-orientated pricing involves pricing your products based on your competitor’s rates.
Competitive pricing isn’t about quick sales but gaining a foothold in your marketplace.
It works in one of 2 ways:
Competitive pricing is prevalent in saturated markets with similar products where pricing is the only differentiator (like Amazon).
Start high, sell fewer products at a higher profit, then reduce the price of original products as newer ones come to market and popularity grows.
While this might sound counterintuitive, brands like Apple have used it for years.
It’s all about the perceived value created using the “Product Scarcity Marketing Technique.” This strategy suits larger companies with an innovative product range unique to their brand.
Penetration pricing involves charging a cheap price to entice your competitor’s customers.
Once you’ve established yourself in the market, you raise your price.
The telecom and internet service market uses this strategy. However, it also works for online retail.
Other forms of penetration pricing strategies are:
Penetration pricing is powerful for creating a foothold in a marketplace by driving traffic to an online product listing and ranking online on Amazon, eBay, Etsy, etc.
Value-based pricing is when you price your product on customers’ perceived product value.
How it works:
Value-based pricing only works if your product has USPs you can provide to your customers.
And while it’s an excellent way to create customer loyalty and gain reviews, it requires a lot of pre-product manufacturing research and an ongoing marketing strategy.
Loss-leading pricing is a strategy where you price one product at a loss to upsell and cross-sell a customer once you’ve gained their trust,
Your goal with loss-leading pricing is to give a little to make a lot at a later stage.
The video game industry is an example of loss-leading pricing at work.
For example:
Loos-leading works for companies with a vast range of add-on products that make up for any losses on the original.
Multiple pricing, or bundle pricing, is a strategy for selling 2 or more products at a set price.
How it works:
Phone companies use bundle pricing in the following way.
Companies use bundle pricing to increase customer loyalty by providing value on a range of products from their comprehensive product range.
Anchor pricing is a price comparison strategy highlighting the savings consumers receive upfront.
Amazon sellers use anchor pricing to promote their products by advertising the listing price next to the original price.
It’s a psychological sales technique highlighting the anchor price (often fictional), today’s sales price (actual price), and customers’ savings if they buy the product.
Any time you see a price with a red slash through it with a `selling now price,` that`s anchor pricing.
The goal is to create urgency with the buyer, making them feel they must buy now or they’ll miss out!
It’s common for new business owners to be unsure which pricing strategy to use for their products.
And many entrepreneurs believe they’ll sell products by offering low prices.
The truth, however, is often the opposite!
Many successful brands succeed by selling at a higher price by bringing value to the market, knowing their target audience’s problems, and how to sell that value to them.
Here’s how:
You choose your pricing strategy based on three things.
Your target audience: Their needs, where they shop, and what they’ll pay.
Your competitors: What they offer, where they sell, and how much they charge.
Your pricing objectives: We’ll talk about those in just a minute.
When you know the first 2, you remove the guesswork from pricing your product and replace it with a strategy you can apply confidently.
You can also find the perfect pricing model by understanding which pricing strategies work for your industry and by identifying the market demand, your consumers’ buying habits, and your aspirations.
Here’s where your pricing strategy takes on human emotions.
I’ll explain what I mean next:
What people will pay for a product isn’t about price; it’s how they perceive the product’s value- how it improves their lives.
That’s what gives your product value, not the price tag!
We’re talking about the psychology of marketing and sales, and by knowing how it works, you’ll become the number one listing in your niche and sell a truckload of products.
But don’t sweat it because you can determine the perfect selling point for your product and outsell your competitors without taking a sales and marketing degree.
By applying these next steps, you’ll find the right price and pricing strategy for your product.
And how to price your products starts with you and your business objectives:
When you have a clear vision of what you want your product price to achieve, you’re one step closer to choosing a price strategy that’ll help you achieve it. For example:
If you’re entering a new market, you could use the penetration pricing strategy to gain sales reviews and establish yourself in your niche.
Or, if your product is better than your competitors, adopt the value-based pricing strategy and run a detailed marketing campaign highlighting the benefits to your customers.
If you’re already selling a branded product range, you could use multiple pricing strategies to create sales for new products.
When creating a luxury product brand that dominates your niche, the market-orientated pricing strategy would be the way to go.
Anyone entering a marketplace to sell high volume at low prices might combine market-orientated, penetration, and anchor pricing strategies.
First, determine your COGS (variable costs), add your fixed, and consider your competitors’ prices, market demand, your target audience’s spending power, and your product’s perceived value.
To calculate a product’s price, add up your variable costs per product, include your fixed costs, and add your profit margin.
The answer depends on several things.
For example:
No magic profit number exists because it depends on your niche, location, and business model; however, the retail industry average is between 5% and 10%.
The easiest way for beginners to price products is using the cost-based pricing strategy.
You add a $ mark-up to the total cost of producing and delivering your product, ensuring you cover your expenses while earning a profit.
And that’s how to price your product in 4 simple steps (plus a few add-ons).
Everything you’ve read in this post is accurate, but if you only take one thing away with you, make it this:
You don’t sell products; you sell the value they give your customers.
Apply that, and you’ll sell a truckload.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.
Terry is a serial entrepreneur with over 25 years of experience building businesses across multiple industries – construction, real estate, e-commerce, hotelier, and now digital media. When not working, Terry likes to kick back and relax with family, explore Taoism’s mysteries, or savor the taste of fine Italian red wine.
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