The Business Owner's Guide to Product Pricing

Written by
Rebecca Smith

Published
Jun 29, 2018

Jun 29, 2018 • by Rebecca Smith

Product pricing is one of the most important parts of running a successful business, and it's also one of the easiest things to get wrong.

Setting a price that's too low can create cash flow problems in a matter of weeks. A price that's too high could turn away valuable customers and cause a severe lack of business.

Any professional job coach or business founder will tell you that there's no one perfect price for each product, but there is a right way to handle product pricing.

If you're launching a new product or are thinking about adjusting the prices on old products, make sure you follow our tips to ensure that you're making a price that works for you and your customers.

Think About The True Cost

How much money does it cost for you to produce your product?

That's a simple question, but the answer will be a little complicated.

A lot goes into making your product that goes beyond raw materials. If you want to handle product pricing the right way, think about how much it truly costs to make your product.

Think about the cost of labor. Don't just about how much you pay your workers, take benefits like medical insurance and other perks like paid time off into consideration.

Overhead costs should be accounted for. Think about taxes, marketing costs, transportation, insurance, space rental fees, and other costs that aren't readily identifiable with the product.

Other future costs should be considered when you're thinking about how to set prices for your product.

Do you plan on borrowing money to get your business off the ground? How much money do you expect to take home as the owner or manager of the business?

Have you considered the difference between margin and markup when you're pricing your product? If you're unsure of how to do so, learn more here.

When you start to paint a broader picture of your true costs, your product can cost more than you'd think. That's why it's important to properly price it to ensure that you're getting your money's worth.

Consider Revenue

It can take awhile for businesses to become profitable, many only manage to break even for a few years while it's getting established.

You may not be able to make a lot when you're starting out but you can price your products to help generate revenue in the future.

Revenue does more than put more money in your pocket. It can let you know if your business is successful or if you need to refine your strategy or product.

Determining revenue targets when you're pricing your product can ensure that you're on the right track to growing your business.

Take time to calculate your target revenue. A financial adviser can tell you what you need to know or use simple formulas yourself.

Don't Try To Price Match The Big Boys

In an ideal world every small business owner would be able to charge as much for their products was big brand names like WalMart, Amazon, and Target do.

Low prices can help bring in customers, but they won't make your business financially sustainable. The harsh truth is that smaller retailers can't hope to price match some of the big names in retail.

Big retailers are able to sell their products at low prices because they buy wholesale. They buy in bulk in massive quantities and can depend on having a huge customer base to buy from them.

Small retailers can't match the big retailer's buying power or the huge loyal customer base. You may not be able to beat bigger names on price, but you could convince people to buy your products based on the value you provide.

Instead of trying to attract customers with low prices, think about what sets you apart from the bigger names. Focus on the quality and uniqueness of your products. Play up your local business owners and ties to the local economy.

Learn The Market

One of the biggest mistakes people can make when they're learning how to set prices is to not pay attention to the market.

Take time to learn about the true market landscape before you start setting prices. See what other businesses are selling their products for, and see how high consumer demand is.

Pay close attention to outside factors that influence the demand for your product. Changes in the market or new tariffs could raise the prices of raw materials you need to produce your products.

Stay up to date on current events and the state of the economy. An important news story about tax legislation or a change in the stock market could tell you a lot about how your customer's current economic needs.

Gauge What Consumers Will Pay

We just mentioned the importance of staying up to date on market news. When you're researching the current state of the market, be sure to devote some time to learn about your customers.

Market forces are one thing, but the mind of the average consumer can be shaped by a variety of factors. That's why it's important for you to understand them before you can properly price your product.

If you have the money to hire a market research firm they can tell you everything you need to know about the average consumer. If that's not in your budget, you can easily conduct research on your own.

Surveys are easy to set up and simple to send out. Poll existing customers via email or social media to find out what they like about your products, what they don't like, and what they like about your competitors.

When you're asking consumers questions be sure to not leave them open-ended. Don't ask them what they'd pay for a product. Give them a range of prices to choose from so you can zero in on what they really want.

Going Beyond Product Pricing

Now that you know the basics of product pricing, it's time to think about other financial factors that can affect your business' success.

Business owners have a lot on their plate and should have someone they can trust to handle finances. Read our post on qualities good accountants should have to ensure that you hire someone right for the job.

And remember, we have a lot of great content for up and coming business professionals. Browse our blog to read posts that can help you jumpstart your career.