Entrepreneur in office studies product
Price your product appropriately using data and hard numbers in order to earn enough revenue, compete in your market and convert first-time customers into repeat clientele. — Getty Images/Chaay_Tee

Pricing a product requires careful planning and an understanding of the value of work you put into making it. You’ll want to ensure you’re earning enough revenue to keep your product — and business — in the market while remaining competitive with other players in your industry.

Here are some best practices and steps you can take to figure out the best price for your product.

How to calculate product pricing, step by step

1. Add up variable costs per product

Variable costs are directly tied to the product. It’s easy to determine a product’s baseline cost if you purchase inventory, but if you make it yourself, your product’s cost is the price of bulk materials divided by the number of items produced.

Next, look at hourly or daily wage, and divide that by the number of items produced in that time. Finally, consider packaging and bonuses. Use unit pricing to calculate the cost of shipping supplies and branded “freebies” (like decals or printed coupons), and add fees determined by your delivery service.

[Read more: How Should I Price My Product or Service?]

2. Add in your profit margin

A profit margin is the percent of a sale that is profit. For example, if a product with total variable costs of $10 sells for $12.50, its profit margin is 20% (the $2.50 profit is 20% of the sale).

If your goal is a 20% profit margin, you can work backward to determine your pricing using this formula:

Price = (total variable costs) / (1 - 0.20)

If the calculated price is much higher than your average competitors’ pricing, you may need to reconsider your production costs. If your price is low, you may be able to plan for an even higher profit margin.

3. Factor in fixed costs

Fixed costs relate to the functioning of your business and include items like insurance, rent, software licenses and permits and payroll expenses. Figuring out your total fixed expenses in a given time period will tell you how many sales you need to make to break even.

4. Test and adjust accordingly

You will need to give your product time to understand how customers respond to its pricing. Usually, conducting a quarterly review can help you gauge customer interest and satisfaction.

If you find sales are lower than needed after a quarter with your product or service set at a particular price, use your industry knowledge to determine if that means pricing up, down or cutting your own costs.

[Read more: How to Price Your Business Services]

If you find sales are lower than needed after a quarter with your product or service set at a particular price, use your industry knowledge to determine if that means pricing up, down or cutting your own costs.

Best practices for pricing your products

Before you set your final price for a product, it helps to do some research and follow some strategic best practices.

Understand common pricing strategies in your industry

Pricing your product requires background knowledge of your industry. Compare your product to similar ones in the market to determine an average price range. If your product is of higher quality, customers may be willing to pay slightly more. If your product lacks all the bells and whistles, you may be able to compete on price with larger competitors.

Conduct market research

Your customer base is your best guide for what works and what needs to be changed. Market research, whether conducted internally or outsourced to a market research firm, will give you important insights into what your customers want and what your competitors are offering (or lacking). This information will also serve as a foundation for your pricing strategy.

[Read more: How to Conduct Market Research to Better Understand Your Customers]

Experiment with pricing

If you’re just starting your business and testing out a minimum viable product, you may have some room to experiment with pricing. To gather the data you need, you will need a large sample size of customers, including customers who are not your usual, repeat buyers. With incremental changes in price within set time windows, you can get real information about what people are willing to pay.

Focus on long-term business profit

Be open to ongoing experimentation with your pricing. You may need to make adjustments to your goals and work new practices into your production and marketing strategy.

As your business evolves, keep your customers with you by rewarding their loyalty and offering incentives to keep buying from you, like sales, discounts and free shipping. This can also attract new customers and keep your product relevant.

[Read more: How to Create a Customer Loyalty Program for Your Business]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published May 31, 2021