Guide to Product Pricing: Understanding Pricing Before You Launch

The price you set for your products is one of the key decisions you will make as a business owner. It affects everything from cash flow to profit margins to the expenses you will be able to cover. In addition, it may affect your customers. Price sensitivity is one of the main drivers of pricing decisions. Customers are well informed about their purchases these days, and they are sensitive to price because they want to maximize their savings.

Entrepreneurs can gain the best pricing data from launching and testing products with real customers-but you need to start somewhere, with a reasonable price. Studies have shown that small differences in price can raise or lower profitability by up to 20% or 50%.

How should I price my products?

The pricing of your products affects everything from your business finances to its positioning in the market, like whether it’s timeless, bespoke, or a trending item. It also affects how much profit you make selling online. Your business relies on it, and it can be both an art and a science. But it isn’t a decision you make once.

The process of determining the retail price of your product is fairly straightforward and quick. Add up all of the expenses involved in bringing your product to market, then set your profit margin on top of those expenses, and there you have it. This is a strategy called cost-plus pricing, and it is one of the simplest methods for pricing a product.

Pricing isn’t a decision you only get to make once.

Why this pricing model works

Your price must sustain your business as the most important element. When products are set at a high price and potential customers don’t buy, you will lose market share. Setting a low price will result in you selling at a loss or with an unsustainable profit margin. Growing and scaling will be difficult as a result.

In addition to how you price against your competitors, consumer trends, and what different pricing strategies mean for your business and customer expectations, there are other important aspects to consider when pricing.  Before you can worry about any such thing, you need to determine if your base price is sustainable.

How to price your product

  1. Add up your variable costs (per product)

To begin with, you must be aware of all the costs involved in getting each product out the door. In order to calculate your cost of goods sold, you’ll need to know how much each unit costs you.

You’ll have to dig a little deeper and look at raw materials, labor, and overhead costs if you make your own products. Which products can you create with that bundle, and how much does it cost? This will give you a rough estimate of your cost of goods sold per item.

Don’t forget that the time you spend on your business is also valuable. Calculate how much you can earn from your business by setting an hourly rate and dividing that by the number of products you can make during that time. To set a sustainable price, make sure to incorporate the cost of your time as a variable product cost.

  1. Add a profit margin

It’s time to build profit into your price after you calculate your variable costs per product sold. If you want to earn 20% profit margin on your products on top of your variable costs, there are two things you need to take into account:

  • You haven’t included your fixed costs yet, so you will have costs to cover beyond just your variable costs.
  • You need to consider the overall market and make sure that your price range still falls within the overall “acceptable” price for your market. If you’re two times the price of all of your competitors, you might find sales become challenging depending on your product category.

Calculate your price by taking your total variable costs and dividing them by 1 minus your desired profit margin, expressed in decimals. You would divide your variable costs by 0.8 if your profit margin is 20%. In this case, that gives you a base price of $17.85 for your product, which you can round up to $18.

Target price = (Variable cost per product) / (1 – your desired profit margin as a decimal)

  1. Don’t forget about fixed costs

You also need to note that variable costs aren’t the only costs.

Expenses that you pay no matter what, whether you sell 10 or 1,000 products, are fixed costs. Having them covered through your product sales is also important to running your business.

 In picking a per-unit price, it can be tricky to figure out how fixed costs fit in. You can do this by setting up this break-even calculator spreadsheet using information you have already gathered about variable costs. You can edit the spreadsheet by selecting File > Make a copy to save a copy that’s only accessible by you. 

This tool allows you to view your fixed costs and variable costs in one place and to estimate how many of a single product you’d need to sell to break even. Calculations such as these can help you decide the right balance between covering your fixed costs and setting a manageable and competitive price Discover how to perform a break-even analysis, including what to watch out for and how to interpret your numbers.

Using a product pricing calculator

If you want to find a profit-making selling price for your products, use a product pricing calculator. This can be calculated using Shopify’s profit margin calculator. It is based on a cost-plus pricing strategy that adds a percentage markup to the total cost of making your product. 

Start by entering each item’s gross cost and the percentage profit you want to make for each sale. Take the example of an item that costs $20 to get on the shelf, and you plan to mark it up by 25%.

By clicking “Calculate profit,” the tool will run your numbers through its profit margin formula to determine the final price you should charge your customers. Here, you can see that the sale price is $25, profit is $5, and gross margin is 20%.

Find the perfect price point for your customer base and bottom line by playing with the numbers. Increase your markup if you can charge a higher price. Then, you can set prices and start profiting from each sale.

Test and iterate once you’re live

You shouldn’t let fear of choosing the “wrong” price stop you from launching your store. It is always possible to test and adjust your price as your business evolves, so long as it covers your expenses and provides some profit. To see how your strategies stack up against similar products, run a price comparison.

It is important to take this approach when it comes to pricing, because what really matters when it comes to pricing is that it helps you to build a sustainable business. Once you have that, you can launch your store or your new product, offer lower prices on discounts, and use the feedback and data you get from customers to adjust your pricing structure in the future.

Source: https://www.shopify.com/blog/how-to-price-your-product