What You Need to Know About Pricing a Retail Product
Pricing is one of the most difficult things you’ll do as a small business owner, and it’s equal parts art and science. If you set your price too high, you won’t make enough sales to make a profit. If the price is too low, you risk operating at a financial loss.
While there isn’t a one-size-fits-all pricing strategy that will work for every product you want to sell, there are certain guidelines you can use to come to a price that makes sense for your business and its customers.
What to consider when setting a price
Regardless of the industry you operate in or the product you’re selling, there are two key areas where you’ll want to do some more in-depth research:
- Your target customers. Market research of your potential customers allows you to get to know the people you’d ultimately like to sell to. You can research online, send out email surveys to existing customers or even hire a third-party consulting firm to do extensive research. Look into demographics, interests, income and other factors that might influence how much someone is willing to pay for your product.
- The competition. Competitive research is about more than seeing what other companies charge for similar products. You also need to think about whether those products are comparable to yours and how your offering stands out in a crowded marketplace, for example.
A simple strategy for pricing your project
Armed with some research-backed insights, you can get to work on the next part of product pricing: choosing a number.
There are countless pricing strategies that you can use to choose that number, but complicated isn’t always better. To start, try this simple three step strategy for setting a product price:
- Add up the variable costs per product. Totaling your variable costs can be easy or complex, depending on your business model. If you order products from a wholesale distributor, your variable costs are relatively straightforward. Businesses that produce something will need to assess the costs of raw materials. Don’t forget to include the cost of your time, too.
- Add up your fixed costs per product. Fixed costs are easier to calculate because they don’t change from month-to-month. Rent is one example, because it will be the same regardless of how many products you sell.
- Determine a profit margin. You also need to make some money from selling products. If you want a 20% profit margin, for example, you can calculate a target price using this equation: Target Price = (Variable cost per product) / (1 - your desired profit margin as a decimal, which is .2 in this case)
Once you have this price, don’t forget to assess your fixed costs. Additionally, if the target price you calculate is sky-high compared to the competition, you’ll need to go back to the drawing board.
Remember, the price you launch with isn’t the price you’re stuck with
Setting a price might sound like one of those decisions that’s etched in stone forever once it’s been made. This assumption couldn’t be further from the truth, however.
If the price of your product needs to change down the line, you are free to make the change. Some customers might be upset if the new price is higher, but you also need to make sure your pricing strategy allows you to turn a profit.