Price is everything when it comes to selling products. Too high and it won’t sell; too low and you don’t earn enough. So just what is the correct selling point?
No business will survive if it doesn’t have the right product pricing. In order to determine the best margin for your products, you have to take quite a few things into account. It’s not merely a question of adding an arbitrary profit margin percentage to your manufacturing cost, you’ll also need to carefully consider all the expenses you incur in the marketing and packaging of the product, as well.
Consider the Competition
Your competition will be crucial in setting a price point. Chances are you are not selling a 100% unique product, though if you are, you can decide the price based entirely on the factors discussed later in this article.
What is everyone else selling the same product for? Is yours different in any way that might change the price? For example, if you are selling nail clippers, it’s feasible to charge more if yours are made from better quality metal or have an extra feature. Remember, if your product is better, you’ll need to let people know why it costs more than the competition.
Cost of the Product
How much does it cost to purchase or make the product you will be selling? This has to be factored into the pricing and will determine your profit margin in the end. It may be possible to cut costs by moving to larger scale production, but keep in mind that prices also tend to change over time, usually rising.
The cost of the item is going to be your base cost. The difference between this and the actual retail price that you sell it for will be your profit margin. The size and expense of the item will help you decide how much to sell it for. As an example, a bicycle that costs you $25 to buy wholesale will probably not sell for $500. However, a $25-50 markup is probably within the realm of reason.
These will depend entirely on the type of business that you are running. If you have an online business, then your overhead costs may be fairly low: internet fees, domain names and hosting, for example. A brick and mortar store will have a much higher overhead and this has to be taken into account. Also keep in mind that the size and number of the items for sale will increase or decrease your operating costs. Large items cost more to store because they require larger amounts of space.
To determine your overhead costs, make a list of all expenses related to the products and store. These should include:
- Employee wages
You may have other expenses related to the business, as well, so these should also be included. Now look at how many items you need to sell at a specific price in order to cover operating costs each month. This is your break-even volume.
An alternative to this is to figure out the number of items you could sell in a month. If you can sell 300 products and your expenses are $300, you need to sell each product at $1 minimum to break even. By setting a slightly higher price, you would be making a profit. If your product costs $0.50 and you are charging $2, but break even at $1, your end profit is going to be $1 per item.
Testing and Tracking
After determining the break-even price for a product, you can adjust your price for the market, keeping in mind the prices of your competitors. For many businesses, constantly adjusting the prices and testing them will result in better sales. You may find that a products sells best at $59.99, whereas only 30% of shoppers will purchase it at $65.99. Keep careful track of the changes in prices and of the sales volume.
Your Target Market
Are you selling to an elite crowd? Or is your target market "mothers on a budget?" Your audience will also help determine just how high a price you can set on something. Those who are looking for an elite boutique experience will be willing to pay more for an item than those shopping discount stores. Keep this in mind when deciding on your profit margin. Where a 50% margin may be acceptable for one market, you may only be able to get a 30% margin with another.
As you can see, there are a variety of factors to consider when figuring out your prices. There is no one-size-fits-all solution, even within the same store, if there are different products. You’ll find that different businesses have different methods of determining the best margin for the products sold, but at the base of all of them, you will find the cost of the product and the operational costs of the business are key.
It takes time and research, not to mention some careful math, to determine the perfect price for your products. It’s worth it, however. Without the right pricing, your business will fail, either from lack of customers because the price is too high or from lack of profit, when the price is too low.