Pricing a product is like baking cookies for your kid's second grade class. In this case, their classmates will only eat cookies within a certain range of crispiness — one you don't have a definitive grasp on. Ideally, every kid in the class will want to eat your cookies, but you realize limitations in resources and variability in preferences make that improbable. So, you have a realistic goal of how many children you'd be happy with feeding.
Sometimes, you'll only have enough time or oven space to make cookies crispy enough to appeal to a small portion of the class. And the optimal cookie crispy-ness you need to hit your goal might depend, in part, upon external factors that are prone to change — like shortages or surpluses of ingredients and shifts in kids' preferences.
I'm not too proud to admit there are some holes in that analogy, but it still gives a solid sense of what it's like to price a product. Honing in on those optimal baking circumstances would be difficult and fluctuate based on an array of circumstances — just like determining an appropriate price-point for your product.
Let's take a look at some of the factors you need to consider when pricing, how to incorporate those factors into your pricing strategy, and what you'll need to account for as time goes on when determining prices for your products.
How to Price a Product
- Understand both your fixed and variable costs.
- Get a feel for your industry standards and competition.
- Get to know who's buying.
- Identify a profit margin and a revenue target.
- Don't be afraid of trial and error.
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1. Understand your fixed and variable costs.
Cost might be the most fundamental factor in pricing a product. No matter what the industry standards, trends, or competition around your product might be, your objective will always be to make money. In order to do that, you need to know what costs you incur when you produce your product.
Consider your variable costs — the ones that change with your level of output. These could include the prices of packaging, raw materials, or shipping. Also, assign a dollar value to the time you spend on producing your product and factor that in as well. Time is money — know how much yours is worth.
Then, consider your fixed costs — the ones that remain the same no matter what your volume of production is. This could include the rent you pay for your facilities, the costs of any permits your business might need to make your product, or your employees' fixed salaries.
Take all these costs together to identify what producing your product costs on a monthly or annual basis. Use that figure to understand what it will take to consistently make a profit.
2. Get a feel for your industry and competition.
It's important to remain mindful of the competition. Find out what people are willing to pay for comparable products and use those industry standards as a reference point. That sets the stage for a process that takes critical thought and self awareness — identifying what differentiates your product from the competition and factoring that into your price.
If you're looking to sell at a higher price point, be prepared to convince consumers that your product is first-rate. If you're trying to sell at lower price points, be ready to show prospects they won't be compromising quality for value if they purchase your product.
If you believe you can pull off one of those kinds of messaging, then price your products higher or lower than your competition. No matter how you plan to price relative to your competitors, always understand where your product stands in its space. That means taking the time and effort to determine both your and your competition's public perception.
3. Get to know who's buying.
Every product has a target market. There are specific buyer personas who will be more receptive to what you have to offer than others. These personas will have different interests, sensitivities, values, backgrounds, and — most importantly — purchasing habits. Get to know who's most inclined to buy your product, and that into consideration when pricing.
Surveys, buyer persona interviews, social media, and several other tools and tactics can be leveraged to get a picture of who you're appealing to. Understand their priorities. Are they willing to pay more for premium quality? Are they looking for deals? Do you think they'll be loyal to your brand?
It won't be easy, and it might take a lot of trial, error, and effort to land on definitive buyer personas to consider when pricing. Still, if you stick with it, you'll put yourself in the best position possible to hit the optimal price point for your product.
4. Identify a profit margin and a revenue target.
The most attractive, exciting figure when pricing a product is profit. In all likelihood, that's why your business exists in the first place. After you've conducted extensive competitive research, determined your product's place in your industry, and gotten a feel for who you're selling to, you'll come up with an ideal profit margin for your business.
That process can be tough. You have to choose a grounded, realistic figure that still allows you to operate, expand, and live comfortably — a margin you're both content with and capable of reaching.
Once you have that figure, add it to your estimated fixed and variable costs, and you have a revenue target. After you have that target, it's relatively easy to figure out how it plays into the overall pricing equation. Estimate how many units of your product you realistically believe you can ship over the next year. Take your annual revenue target and divide it by that number. Now, you have a rough picture of what you have to charge for your product.
5. Be ready for some trial, error, and volatility.
There's no exact science to pricing a product, so there's no guarantee you'll nail it on the first try. You shouldn't be reluctant to change your price if it's not working for you. Just make sure you're consistently running a profit and covering your expenses. Make some tweaks here and there as you go, and you'll eventually land on that optimal price point.
That being said, there are some potentially volatile scenarios you should always be mindful of. Different, often-shifting external factors can force you to change prices. That could include the volume of product you can ship, your competitors' prices, the efficacy of your marketing efforts, or the public perception of your product. In all likelihood, your price will be fluid. It will take some testing to get it right, and you might find yourself adjusting it on a consistent basis.
There are a lot of moving parts to consider when pricing your product, including some critical factors that will inevitably be beyond your control. Though there are strategies you can put in place and elements to be mindful of, you might not always have a definitive grasp on what your product should cost. But, if you remain patient and produce the best product you can, you'll be in a solid position to move as units as possible.