Price is what a customer pays in terms of money to acquire a product or avail a service. As an entrepreneur setting your product price can be a real task.
Several factors are involved in deciding the price of a product. This is because Product pricing plays a very significant role in determining the position your product will acquire in the market.
This becomes more significant in today’s scenario when the market is full of competitors. As a Start-up, the price of your product is capable of making or breaking the market for you. It is an essential element of financial modelling.
High Price vs. Low Price
You would have noticed that most products that are considered branded and thus, of great quality, are sold at quite higher prices. However, in contrast to other similar products available in the market are sold at lower prices.
This scenario reflects the common belief system that states “when you pay for bananas, you buy monkeys”. Therefore, in an attempt to get the supreme quality products, they are willing to pay higher prices. However, this is not always true.
Sometimes keeping the cost way too high can make your customers lose interest. This can be especially true in terms of startups where you still have to establish your product in the market by winning the trust of your customers.
At this point, you might consider keeping the prices as low as possible for your customers, so at least they may give it a try once. Howbeit, if the price is too low even if it attracts a lot of customers it can have a negative impact on your profit margin.
Sometimes, it is also seen that such tactics were used by the companies to create initial awareness about their product but as soon as the prices were hiked, the sales declined.
Confused? Then how do you decide the price for your product?
For any product to start and maintain a consistent market setting the right price is very important. It is capable of making or breaking the market for you.
So, here we are with the 7 most useful tips that you must keep in mind while setting the price for your product.
Keep reading…
1. Include All the Variable Costs
2. Indirect Fixed Costs and Break-Even Point
3. Determine Your Profit
4. Value-Based Pricing
5. Scan Your Competitors
6. Study the Market
7. Update the Product Prices
1. Include All the Variable Costs
Variable costs include the actual expenses incurred right from the start of product manufacturing till the time it reaches a customer. It includes the cost of raw material, manufacturing cost, packaging & shipping charges, etc.
The first cost considered is the cost of goods sold. This includes the cost of raw material and manufacturing per unit of product.
After this, the time and labour costs, incurred in the production of a particular product, are counted. You can decide the cost of time on an hourly basis. This means you first decide the hourly income you expect from your business and then divide it by the number of products that can be manufactured in this duration.
Finally, you add other variable expenses such as packaging & shipping cost, promotional material cost, and affiliate commissions. The sum total of all these variable costs is known as the total per-product cost.
2. Indirect Fixed Costs and Break-Even Point
Two other major factors that must not skip while deciding the price of your product are the indirect fixed costs and breakeven point.
Indirect fixed costs include salaries of office staff, rent of office space, marketing and advertisement, depreciation cost, insurance, and other professional fees, etc.
Basically, these are the expenses that you are bound to pay irrespective of your sales or production. Therefore, it is crucial that this cost is covered under the price of your product. However, how to break these costs in terms of the per-unit price of your product can be difficult. Understanding the breakeven point will help you in this regard.
It refers to the level of production at which the total revenue becomes equal to the total expenses. The formula used to calculate the breakeven point is mentioned below:
Break–Even point (Units)= Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)
By calculating the breakeven point you will be able to determine the number of units of the product that you will have to sell to equalize the variable and fixed costs. This, in turn, will help you to make an informed decision while setting your price.
3. Determine Your Profit
The next step is to determine the extent of profit you wish to make. The profit margin should be enough to save you from regular market fluctuation.
Profit margin is usually expressed as a percentage and is an indicator of the money you make out of your sales.
You have to consider both fixed and variable costs while deciding your profit margin. Thorough market research will also give you an idea to set an acceptable price.
The basic formula used for calculating the profit margin is given below:
Gross Profit Margin = Gross Profit / Revenue x 100
4. Value-Based Pricing
The aim of any business is to earn a decent profit. This is known as cost-plus pricing. However, as a long-term goal for your company, you will also have to identify what your customer is ready to pay.
This can be determined by how valuable your product is for your customers. The high-quality and other superior features associated with it as well as the capacity of customers to identify and appreciate those features is what makes your price look reasonable.
You can also conduct small online or offline surveys to understand the psychology of your customers.
“Pricing is all about customer value. Price is what you pay. Value is what you get.”- Warren Buffet
5. Spy on Your Competitors
It is always a good idea to keep an eye on your competitors. In terms of setting the price, it will help you understand the strategies they are using for the evaluation of the price of their product.
The right price for your product can only be determined as per the market norms that are set by the already existing companies.
For example, if your focus is to build a large market share for your product you may launch your product at a relatively low price than your competitors. This might help you gain customer trust for your future products and services.
However, if you want your customers to feel like they are about avail of some novel and exclusive services that are not available anywhere else, setting a price towards the higher end can be a good decision. If everything goes well and your customers believe you, this might help you establish your product as a brand right at its initial stage.
6. Study the Market
You cannot just decide your profit margins with your own mind. Neither can you set your price to match or beat the price of your competitor? You will have to study the market to understand how the other brands are doing and what the customer requirement is. However, the foremost thing to do is to identify your target audience so you can survey the market keeping their needs in consideration.
Surveying the market will also give you an idea about the other factors that may affect the price or sale of your product. These factors may include simple Geographical issues, legal concerns, etc.
A major example of such factors is the extreme shift observed in the market during the COVID-19 times. As per a survey, owing to the lockdown restrictions the tour & travel industry collapsed badly. On the other hand, the technology industry observed an upsurge.
7. Update the Product Prices
The price at which you launch your product does not have to stick with it forever. There are a lot of regular ups and downs in the markets that will affect the variable and fixed costs associated with your product.
Therefore, you will have to remain updated with the latest market trend and keep revising the price of your product accordingly.
Other than the market trend, there can be other valid reasons for you to raise the price of your product. For example, when you decide to re-establish your company from a value-oriented service provider to a high-quality brand, you may apply a price hike. This is known as strategic change.
Other reasons may include a competitor raising the price of their product. This usually means that the overall price of that industry or service in the market is going up. Hence, it becomes obvious for other similar companies to hike their product price in a similar range.
Conclusion
Considering all the challenges it may be difficult for you to set the correct price for your product. However, by following the tips mentioned above, you will be able to make an informed decision.
The simple things like knowing your costs and surveying the market as well as competitors can be of great value.
Hope we could resolve your problem. You can thank us later.
FAQs
What are the factors to consider when setting a price?
Include all the variable costs, calculate indirect fixed costs and break-even points, determine your profit value-based pricing, spy on your competitors, study the market, and update the product prices.
How do you set a price for a product?
Use different pricing plans, spy on your competitors, include all your costs and keep flexible pricing.
What is the selling price formula?
The selling price formula is: Selling Price = Cost Price + Profit Margin.
