For small businesses, success requires balancing what your customers want with what you need to make a profit. That’s why strategically pricing your products is key. With the right prices, you can generate more sales and maintain a healthy bottom line.
Setting your product prices can seem intimidating, but it’s important to remember that you can—and should—change them as you go. Here’s how to determine your pricing strategy and make adjustments when you need to.
1. Determine the costs to create (or purchase) and package your products
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. 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.
3. 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.
4. 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.
5. 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.
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.
If you’re ready to get up and running online, Mailchimp stores and the platform’s built-in marketing features provide what you need.