How to Price Your Products to Turn a Profit

1. Factor in variable costs

Variable costs do not remain static month after month. Instead, they change in relation to the number of products you sell. You'll need a deep understanding of the labor cost, overhead and raw materials needed to produce your products. By calculating how many products you can produce with these considerations in mind, you can calculate the cost of goods sold.

Here is an example of how to calculate the variable cost per product:

• Cost of goods sold $4 per unit
• Production time $1 per unit
• Packaging $1.5 per unit
• Promotional materials $0.5 per unit
• Shipping $4.00 per unit
• Total cost $11 per unit

Don't forget packaging in your pricing strategy

It may seem obvious, but when setting a price for your products, you should cover both your product and packaging costs.

Start by identifying these costs:

• Cost of goods sold: The total amount you spend on materials and labor when making each product—or the cost per unit to buy your products from a wholesaler
• Packaging cost: The total expense for each box, the packaging inside and out, and any marketing materials you include in the package

Add the cost of goods sold and the packaging cost to get your total product cost—this will be useful when calculating your prices.

Product cost = Cost of Goods Sold + Packaging Cost

Remember that based on product material and labor or where you buy from, your product costs will vary from item to item.

Your packaging cost may also increase or decrease based on the size of your products and whether or not they’ll be shipped. Be sure to include all packaging and any promotional materials you plan to include—like a business card, thank you note, or coupons—when you calculate this cost.

Keep a record of both your product and packaging costs to reference when you calculate or adjust your prices.

Of course, you want to sell high-quality items, but production should be efficient enough that you don’t pass along too great a cost to your customers. High prices can stunt sales unless you can communicate value and convince shoppers that it’s worth the price.

And as you choose packaging, consider what’s best for your target customers. Will they appreciate custom or branded packaging from your business? Or would they be more likely to make a purchase if your prices are lower and your packaging is more generic?

2. Consider your fixed costs

Along with variable costs, you also have fixed costs that do not change based on your sales volume. In other words, you'll have the same fixed cost whether you sell 100 products or 100,000 products. These expenses are integral to your business, and you need to cover them in your product pricing and sales.

You may wonder how fixed costs figure into your per unit pricing. You can use a break-even calculator or spreadsheet to factor in the total variable and fixed costs and then divide them by the projected pricing volume. Your pricing will need to exceed this amount for you to break even.

Examples of fixed costs include:

• Depreciation: Declining value of assets, which eventually decreases to $0.
• Amortization: Allocation for intangible assets.
• Insurance: Business liability and other insurance.
• Rent/Mortgage: This is the amount paid for your business space, which could be an office, facility or warehouse, to name a few.
• Utilities: water, electricity, and other utilities.

3. Use a product pricing calculator

Learning how to price your products to turn a profit starts with calculating your expenses. To simplify your pricing strategy, you can use a pricing calculator to find a reasonable price that includes your target profit.

There are many free pricing calculators available online. It’s essential to understand what pricing strategy a calculator uses prior to choosing it. You simply enter your total cost per item and then add in a percentage profit. For example, if an item costs $20 to make, market, and sell, and you want to make 25% profit on each product, you'll need to charge at least $25.

To start, simply enter your gross cost for each item and what percentage of profit you’d like to make on each sale. Let’s say it costs $20 to get your item on the shelf and you want to mark up the price by 25%. You'll have to price the product at $25.

Step 1: Learn pricing models in your industry

There are many types of pricing strategies applied by product producers. In this guide to pricing methods, we’ve highlighted a few of the key strategies.

Dynamic pricing, for instance, is based on customer demand. When demand rises so do prices and when demand lowers prices do too. Cost-based pricing involves adding all the costs to make the product and then marking it up with your target margin. Copy marketing involves changing your price to match or beat competitor pricing. On the other hand, when you price above the market, you make your product more expensive than those of competitors.

Step 2: Capture more market share using price elasticity

Many businesses think lowering prices is how to get more people to purchase their products and gain customer loyalty. However, this is referred to as the race to the bottom. The truth is you can't continue lowering prices forever — or you have no profit to show for it.

However, it sometimes makes sense to lower your prices to take advantage of lower production costs.

Price elasticity calculates how prices and volumes change. When demand increases, prices tend to go up. However, it's important to know how sales volume will impact your bottom line. Lowering prices to drive up volume can temporarily increase revenue. However, you'll need a longer-term strategy to encourage confidence in your brand.

Step 3: Set your pricing to drive continuous profitability

Static pricing doesn't allow you to account for changing costs. Therefore, it makes sense to move your pricing with the market and current cost.

Here are a few high-level tips to help you manage your pricing:

1. Charge more for best-selling products.
2. Use seasonal discounts and promotions to move your products and increase volume.
3. Track but don't copy prices that your competitors charge.
4. Don’t meet lower prices without considering your own factors.

4. Scope out your competition

Your product pricing should make sense to your customers based on the quality of your product, how unique the item or your business is, and what they’ve come to expect from companies with similar offerings.

Based on your unique selling proposition—which is what sets your business apart from other brands—your products may be valued higher than those of your competitors. Regardless, it’s wise to do some research to get a sense of the appropriate price range for your goods.

Find other businesses that sell similar items or are in the same market (handmade houseware, for example) and track their prices over time. Notice if they adjust their prices or if they remain consistent. If there are product reviews available for these items, take note of how customers refer to the value of the item based on its price.

When it’s time to set the price for your products, use those prices as a gauge and factor in your unique selling proposition.

Should I base my prices on my competitor's selling price?

Merely copying your competitor’s prices won't get you very far. Instead, stack up your competition in order of lowest to highest price ranges. Determine where your product fits into this stack and your desired profit and set your price accordingly.

The advantages of competitive pricing include low risk, accuracy, and simplicity. It's a great way to set your price if you're just starting out and don't have much experience in the field. However, you may leave opportunities on the table if you rely on someone else’s pricing. Following the herd can simplify your pricing strategy but may hurt your brand.

5. Identify your target profit margin to set a price

One of the best ways to calculate prices is based on your target profit margin. A profit margin is a ratio, typically written as a percentage, that indicates how much money your business makes from sales. So, your target profit margin is the ratio you’ll aim for.

Do research and evaluate your business to select a target profit margin that’s based on your growth goals, what’s normal in your market, and your costs.

Here’s how to determine the right price based on your target profit margin (which you should write as a decimal for this equation):

Product Price = Product Cost / (1 - Target Profit Margin)

As you iterate prices—perhaps because the product cost changes or sales are low, for example—calculate your profit margin to make sure you’re still on track.

Profit Margin = (Product Price - Product Cost) / Product Price

For example, if your total cost to create a product is $15 and you sell the product for $37.50, your profit margin is 60% and your profit is $22.50.

You may want to set a profit margin that’s consistent for all products, or it may vary. Here’s why: If you use the same margin rate to price all of your products, your profit will be higher on higher priced products, and lower on lower priced products.

For example, a 50% margin on a $10 product is $5, but on a $15 product with the same margin, you make $7.50. That could be viable, depending on what your business needs. But if you sell products that range more drastically in cost, you might use different profit margins—like 80% on a $12 product for a profit of $9.60, and 20% on a $250 product, profiting $50.

No matter what your strategy, you should determine what it will take to make your business sustainable, set profit margins accordingly, and price your products using these formulas.

6. Observe your sales data and adjust as needed

Once you launch your online store, tracking sales will help you assess whether you’ve priced your products correctly.

Are your products selling out quickly? Or is inventory not moving at all? If your sales are either very high or very low—as a whole or for an individual product—you likely have an opportunity to adjust your pricing. If your items are flying off the shelves, you might have priced them too low. If they aren’t moving at all, your price could be too high.

Try increasing or decreasing your product prices accordingly, but do so in small increments. Find the price that works for your business: This means that you have a steady flow of sales, and you’re able to keep up with production.

Keep in mind that if you decrease prices, you still need to maintain a healthy profit margin. When you set your initial pricing, leave yourself room to go up or down based on sales trends, rather than feeling stuck at the lowest price point you can offer.

Sometimes, sales will fluctuate based on something other than the product itself or its price. If you sell beach umbrellas, for example, you may recognize that they sell better in the summer than the winter. Be ready to accommodate seasonality and other variables in your pricing (and marketing) strategy.

The cost of goods sold can also change due to outside factors—like a shortage in materials or an economic recession. Make sure your pricing strategy is nimble enough to respond to what’s going on in your market and the wider world.

7. Plan for promotions

Unless you make the strategic decision to never offer items at a discount, confirm that your margins will maintain healthy levels even during promotional periods. For all of your products, when setting your initial price and margin, make the calculations again as if you were to offer a 10, 20, or 30 percent discount, for example.

Even during holidays and promotional periods, you should turn a profit. In fact, promotional planning starts when you set your everyday price for products.

What are the best product pricing strategies?

There are many different types of product pricing models. Understanding the reasons for using each one can help you select the best strategy for your company.

Here are a few of the top pricing strategies:

Competitor pricing

This strategy focuses on undercutting or meeting the price of your competitors. For example, if you sell an electronics product for $400 dollars but your competitor sells it for $375, you may adjust your price down to $375 to match the competition.

Value-based pricing

Under this strategy, you determine how much customers will pay for your product. By increasing your pricing, you can maximize profits. Additionally, you can increase perceived value through digital and traditional marketing efforts and brand management.

Cost-plus pricing

Also known as market pricing, this is one of the most common types of pricing strategies. You simply take the cost per unit to produce the item and add your margin on top of it to get your total price. For example, say it takes $30 to produce a pair of shoes and you want to make a 20% ($6) profit. In this case, you would charge $36 for the product.

Dynamic pricing

Also called surge pricing, dynamic pricing is based on customer demand. This is how the airlines work when setting prices for specific seats. They increase the price of popular seating to increase their profitability and allow customers to sit in premium seating for an extra fee.

Penetration pricing

Sometimes, when businesses introduce new products, they intentionally set the price low. In this case, it’s lower than the cost to produce the item. In this case, they flood the market and gain market share in the hopes that customers will continue buying their product if they like it.

Make sure the price is right

When setting prices for your products, it’s important to do your research, consider your costs, and use data to determine what works for your business. Using these tips, you can set a strong foundation and feel confident as you make changes along the way.

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