Samiksha Hiwase | 6 min read | August 29 , 2020
How to Decide the Price of your Products
Table of contents
- 1. QuickRead
- 2. Factors to consider in how can you price your products
- Variable Cost (per product)
- Know your Customer
- Avoid Generic phrases
- Profit margin
- Revenue Target
- 3. When to Raise Prices
- 4. When to Lower Prices
- 5. Summary
One of the keys to business achievement is costing your items appropriately. Setting the incorrect pricing to products will cause major issues to your business. So, this is a difficult task to decide the price of your products. You have to understand the relation between cost and quality, target to customers, tracking your competitors costing, and many factors.
Keep reading this blog to get the details on what are the factors to be considered for deciding the price of your products and when to raise or lower the price of the products.
2. Factors to consider in how can you price your products
The following are the key factors that should be considered while decking the pricing of the products.
Variable Cost (per product)
Most importantly, you want to recognize all expenses getting in the production of every item. You will have to find how much each unit cost for you and what will be your total cost for the product.
Perform an analysis of the raw materials that you use in production. You can calculate the cost of your raw materials, all expenses, packaging cost. Then you will get an idea of the rate of your product that can be sold per item.
Hence, remember the effort, and the time you gave to your business. To value your time, set an hourly rate you need to obtain from your business, and afterward separate that by what number of items you can make in that time.
Here’s a pattern listing of prices for every product
|Cost of products sold||$3.00|
|Cost of Packaging||$1.50|
|Total per-product cost||$15.50|
In this model, your complete per-item cost is $15.50. Using this process you can fix the variable rate for each product.
Know your Customer
Undertaking a type of statistical surveying is fundamental to becoming more friendly with your client because the more you know about your customer the better you will be able to provide what they need. This kind of survey is performed on your current customer base. The market research firm will tell you about your potential customers and explore your market.
Market surveying firms can investigate your market and section of your potential clients on the points such as – social economics, what they purchase, whether they are cost-sensitive, etc. If you don’t want to spend money on the market research then just observe and perform analysis on the consumers. And figure from your observation which group of customers you want to target and accordingly set the price of your product.
At some point make sense of which section of customers you’re focusing on and rate accordingly. Survey data will assist you in deciding whether your cost is correct, what level of administration or incorporations you ought to offer and lastly if you are focusing on the correct market. Sometimes it might be you have to change your market to make your business more beneficial.
When you have a complete number for your variable expenses per item offered, it’s an ideal opportunity to decide your profit margin. Let’s say you need to earn a 20% earnings margin over your variable costs. After fixing this percentage, do not forget the two major points as follows:
- You can set the actual rate of your products beyond your variable costs.
- In case if you set 2x the price of all of your competitors, then you may discover some difficulties for selling your items.
When you are prepared to compute a cost, take your total value of expenses, and divide them using 1 minus your ideal net revenue, communicated as a decimal. The 20% profit margin will be 0.2, so divide your variable costs by 0.8.
The formula will be:-
Target Rate = (Variable price) / (1 – the profit margin you want in decimal)
In this example, Target Rate = 15.50 / (1 – 0.2) = 15.50 / 0.8 = 19.The above method fin pout the base rate for your product is $19.37 that you can round up to $20.00.
It’s also useful to study the competition – after all, your client will do this, as well. Are your competitors selling the items similar to yours? If so, you could use their pricing as a preliminary step. Also, you can offer extra service together with your product, or is your item perceived better quality? In this case, you might have the option of setting a higher cost for your products. Be cautious about your competitor’s differences and always consider your price.
Observe on the points like What group of customers they are targeting, How is their position in the market, What are they costing for different kinds of services and products. The answers to these points will provide you the valuable benchmark for your costing. You have to gather all this information through secret shopping, phone calls, publish data, etc.
You should have your income target for the profit you want your online store to make in the particular year. Take that sales target, calculate the costing for production, marketing, and promoting your product and you will get the cost of per product. If you have only one product for sale, then this will be an easy process. Then divide your sales target through the number of units you assume to sell and you have the rate at which you need to promote your product in the order it will accomplish your sales and earnings desires.
If you have various kinds of products then fix your revenue target on each category of product. Then do a similar calculation to reach on the rate at which you have to offer every item so as to attain your financial objectives.