Tried and Tested Steps to Price Your Products Correctly
Pricing your products is one of the cornerstone decisions you’ll make because it impacts almost every aspect of your business. Your pricing is a deciding factor in everything from your cash flow to your profit margins to which expenses you can afford to cover.
The most crucial element of your price is that it needs to sustain your business. If you price your products at a loss or an unsustainable profit margin, you’re going to find it challenging to grow and scale.
Other essential factors that your pricing needs to account for include how you’re priced concerning your competitors, your pricing strategies for your business, and your customers’ expectations. But before you can worry about anything like that, you need to make sure you’ve found a sustainable base price.
How to Price Your Product
- Add up your variable costs (per product)
- Add a profit margin
- Don’t forget about fixed costs
There are three straightforward steps to calculating a sustainable price for your product.
Add Up Your Variable Costs (per product)
First and foremost, you need to understand all of the costs involved in getting each product out the door.
If you order your products, you’ll have a straightforward answer to how much each unit costs you, which is your cost of goods sold.
If you make your products, you’ll need to dig a bit deeper and look at a bundle of your raw materials. How much does that bundle cost, and how many products can you create from it? That will give you a rough estimate of your cost of goods sold per item.
However, you shouldn’t forget the time you spend on your business is valuable, too. To price your time, set an hourly rate you want to earn from your business, and then divide that by how many products you can make in that time. To select a sustainable price, make sure to incorporate your time as a variable product cost.
You are wondering what kind of promotional materials you might need for your products? One of the most common ones in an ecommerce context is marketing materials or additional gifts to level up your ecommerce packaging and unboxing experience.
Add a Profit Margin
Once you’ve got a total number for your variable costs per product sold, it’s time to build profit into your price.
Let’s say you want to earn a 20% profit margin on your products on top of your variable costs. When you’re choosing this percentage, it’s important to remember two things.
- You haven’t included your fixed costs yet, so you will have costs to cover beyond just your variable expenses.
- You need to consider the overall market and ensure that your price with this margin still falls within the overall “acceptable” price for your market. If you’re 2x the price of all of your competitors, you might find sales become challenging depending on your product category.
Once you’re ready to calculate a price, take your total variable costs, and divide them by one minus your desired profit margin, expressed as a decimal. For a 20% profit margin, that’s 0.2, so you’d divide your variable costs by 0.8.
In this case, that gives you a base price of $17.85 for your product, which you can round up to $18.00.
Target Price = (Variable cost per product) / (1 – your desired profit margin as a decimal)
Don’t Forget About Fixed Costs
It’s important to remember that variable costs aren’t your only costs.
Fixed costs are the expenses that you’d pay no matter what, and that stay the same whether you sell ten products or 1000 products. They’re an essential part of running your business, and the goal is that they’re covered by your product sales as well.
When you’re picking a per-unit price, it can be tricky to figure out how your fixed costs fit in. A simple way to approach this is to take the information about variable costs you’ve already gathered and set them up in this break-even calculator spreadsheet. To edit the spreadsheet, go to File > Make a copy to save a duplicate that’s only accessible to you.
It’s built to look at your fixed costs and your variable costs in one place and to see how many units you’d need to sell off a single product to break even at your chosen price. These calculations can help you make an informed decision about the balance between covering your fixed costs and setting a manageable and competitive price.
Find out everything you need to know about performing a break-even analysis, including what to watch out for and how to interpret and adjust based on your numbers.
Test and Review Once You’re Live
Don’t let the fear of choosing the “wrong” price hold you back from launching your store. Pricing is always going to evolve with your business, and as long as your price covers your expenses and provides some profit, you can test and adjust as you go. Run a price comparison to see how your strategies stack up.
Taking this approach will give you a price you can feel confident about because the most important thing when it comes to pricing is that your pricing helps you build a sustainable business. Once you have that, you can launch your store or your new product and use the feedback and data you get from customers to adjust your pricing strategy in the future.