10 Tips for Pricing Your Product
Countless small business success stories—not to mention the illustrious career of Bob Barker—demonstrate the importance of getting the price right. Beyond the logos, user interfaces and organization charts, your business values the bottom line, and your customers are no different.
Pricing isn't a static venture: it should and must slide with changing market considerations, new products and evolving business goals. You've got to start somewhere, though, so before slapping that $5.99 sticker on your new widget, check out these 10 tips for pricing your product.
1. List out your product's true costs
There's a lot that goes into making your product, and excluding any of those costs can mean egregiously setting your price too low. When calculating cost per product, don't forget to include:
- All materials
- Labor, including worker benefits
- Overhead, meaning any cost not readily identifiable with the product. Think taxes, insurance, rent, marketing and transportation
- Truly hidden costs, like the cost of borrowing money, your own salary as the owner/manager of the business, a return on investor capital, capital for future expansion and the replacement of fixed assets (e.g. in-house production machinery) as they age
2. Price higher than you would initially think to
Keep in mind that costs for small businesses are almost always higher than they think. This is because, unlike larger and more established companies that have worked for years to optimize their process and become more efficient, early transactions can be clumsy. The obvious implication is that product pricing should be higher to account for these inevitable bumps in the road.
3. Analyze your customers
If you've got the capital to hire a market research firm, great, start there (if you're not sure whether it's worth the capital, then consider conducting your own market research). If that's out of your price range, surveys don't cost a thing, so email them out to existing or potential customers and try to find out how they value your products versus those of your competitors. Finally, just ask. The old methods are sometimes the best, and it doesn't hurt to chat up customers when they come into your store or reach you on a sales call. Remember to make it easier by being specific with a potential customer; don’t ask, “how much would you pay for this?” but rather “would you pay $5 for this? $10? Would you pay $20 a month for unlimited access?”
4. Analyze your competitors, and compare yourself to them honestly
Ruthlessly honest self-evaluation is the name of the game here. How do you want to position yourself? High-end? Low-end? Look at their sales strategies: do they cut prices on weekends? Have annual inventory clear outs?
5. Don't try to compete with big stores' pricing
They buy in bulk. More bulk than you. It's very unlikely that you're going to be able to beat them on price, so don't try. Instead, highlight the value you can provide, like more personalized customer service or the knowledge that their funds support a small/family-owned business.
6. Consider your real business priorities
Long-term goals don't always jive with immediate profit maximization for any given sale. Increasing market share, for example, may lead to an eventual and dramatic decrease in costs, or create "network effects," increasing the value of your product as more and more people use it. Microsoft's Windows operating system is a great example: the more people who used it, the more software designers made applications to run on the platform, the more valuable Windows became.
7. Consider using add-ons
The classic example is a car salesman who locks down a sale (front-end), then sells the same customer add-ons and financing options (back-end). Think of ways to similarly tier your pricing structure, allowing you to sell people early with a low price before offering logical and attractive add-ons that will push you further into the black.
8. Come up with tiered pricing
If possible, consider ways that you can break up your pricing into “tiers” so that it meets the needs of different customers. Offer more basic and affordable no-frills options for those on a budget while giving a premium experience to those who are willing to pay for it. This can meet the needs of a wider demographic and give you a chance to capture a larger market share.
9. Have a plan to increase prices gradually
It's entirely likely and healthy that prices rise on any given product, but doing so too abruptly can instantly alienate your current customer base. Have a strategic price-increase plan for the next 2 to 5 years (5 to 10% is a good target), and be gradual to avoid startling the herd.
10. Analyze your conversions, then experiment
If you're only selling 1 out of every 20 customers that look at your product, your pricing might be too high. Try dropping the price and seeing where the profit equilibrium lands after a small window of time. Try raising it. Tinker! It's not enough to just monitor your overall profitability every month: you need to monitor the profitability of your individual products (for one method of testing prices, consider using landing pages).
Rochelle is an experienced business writer, marketer and researcher. She is currently the Senior Editor and Content Producer at Intuit.