How To Price A Product Formula

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Shares 243 How to price your products – this is a question I get ALL the time. And every time I browse Etsy and many other online stores I see it ­– the shockingly low price. Too many sellers think low prices mean selling more. Are you one of them? The reality is that savvy shoppers looking for handmade goods disagree. Pricing low could mean pricing yourself out of a sale. Your price communicates your product’s value to the consumer and is a major factor in your success.

How do you choose your prices? Do you look at competitors’ prices and chose a comparable price, or do you aim lower? Do you factor in labor, materials and profit? Do you keep your prices low because you’re afraid pricing higher will mean selling less? Instead of asking yourself what an item is worth, you might tend to ask what will consumers pay? If that’s the case, not only are you cheating yourself with an unfair prices, but also other sellers.

When too many sellers in a niche under-price their products consumers grow accustomed to the low price, and feel cheated when asked to pay a fair rate. It’s time to change that.  If you’re looking for a way out of the bargain basement and into profitability, here are some tried and tested tactics that work for how to price your products: Price your products according to the market: One simple way to ensure your prices are fair to you (and other artisans) is to look at sellers in your niche.

Find 3-5 who are selling items similar to your and find the average price. Introduce a new line: Many sellers many fear they’ll loose steady customers if they suddenly raise prices. I suggest they try an experiment instead. Create a new line of items priced fairly and leave your old prices alone. You might be surprised how much faster the newer higher priced items sell. Pay your way: If your price includes only material costs, you’re not paying yourself for your labor costs.

Increase your prices to add a small profit on every item, and take that money out of the pot every month. Seeing the result of your efforts will keep you motivated. Think about a wholesale price: Your business may be just you right now, but down the road your hobby business could become a full-time job. At any moment a boutique or e-retailer could contact you to carry your product. Would you know what to charge? How to price your products – handmade, Etsy and beyond This is the simplest formula you can use: – (Labor + Materials) x 2 = Wholesale price The x2 takes into account your profit and overhead as well, so you’re covered.

As far as what your labor costs should be, think about how much you want to pay yourself per hour or how much you would pay someone per hour to make your products and divide that number by how many products you think you can make per hour. If an hourly wage is not what you want to measure, then think about how much salary would want to pay yourself per month (or per year) and use that number instead of the hourly rate.

If you plan on selling your products to other retail stores, you’ll have to take that into account. Your retailers will usually mark up your wholesale price at least 2 times. To set your retail price, use this formula: – Wholesale Price x 2 = Retail Price (or MSRP) So if each set of earrings you make costs you $2 in materials, and you pay yourself $15 for the half hour it takes to make them, then your wholesale price is $34 and your retail price is $68.

To figure how you should price your products, download the free pricing worksheet below – simply plug in your own numbers and you’ll have a range of pricing to start with. Please keep in mind that if you plan on working with sales reps or distributors, you will want to factor that in to your pricing. I hope the strategies above will help you figure out how to price your products and bring your prices to a level that treats you fairly and rewards your creativity and efforts.

  Pricing your products fairly tells consumers that you have a quality product to offer, so start spreading the news. In the comments below, I’d love to know about YOUR pricing strategy. What pricing formula do you use and how is it working out for you? Leave a comment and let me know.

See Also: Pole Barn House Prices Finished

For anybody that is pondering getting into the enterprise of promoting wholesale products at retail charges, the very first thing that will come to head is, exactly where do I obtain the wholesale products and solutions from? The second consideration will likely be, which wholesalers or fall shippers can i rely on?

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One of the secrets to business success is pricing your products properly. Price your products correctly and that can enhance how much you sell, creating the foundation for a business that will prosper. Get your pricing strategy wrong and you may create problems that your business may never be able to overcome."It's probably the toughest thing there is to do," says Charles Toftoy, associate professor of management science at George Washington University.

"It's part art and part science."There are a variety of different types of pricing strategies in business. However, there's no one surefire, formula-based approach that suits all types of products, businesses, or markets. Pricing your product usually involves considering certain key factors, including pinpointing your target customer, tracking how much competitors are charging, and understanding the relationship between quality and price.

The good news is you have a great deal of flexibility in how you set your prices. That's also the bad news.The following pages will detail how to meet your business goals in pricing products, what factors to consider when pricing, and how to determine whether or raise or lower your prices. How to Price Your Products: Meeting Business GoalsGet Clear about Making MoneyThe first step is to get real clear about what you want to achieve with your pricing strategy: You want to make money.

That's why you own a business. Making money means generating enough revenue from selling your products so that you can not only cover your costs, but take a profit and perhaps expand your business.The biggest mistake many businesses make is to believe that price alone drives sales. Your ability to sell is what drives sales and that means hiring the right sales people and adopting the right sales strategy.

"The first thing you have to understand is the selling price is a function of your ability to sell and nothing else," says Lawrence L. Steinmetz, co-author of How to Sell at Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee (Wiley 2005) and a business consultant in Boulder, Colo. for 40 years. "What's the difference between an $8,000 Rolex and a $40 Seiko watch? The Seiko is a better time piece.

It's far more accurate"¦. The difference is your ability to sell."At the same time, be aware of the risks that accompany making poor pricing decisions. There are two main pitfalls you can encounter - under pricing and over pricing. Under pricing. Pricing your products for too low a cost can have a disastrous impact on your bottom line, even though business owners often believe this is what they ought to do in a down economy.

"Accurately pricing your product is critical at any point in the economic cycle but no more so than in a recession," says Laura Willett, a small business consultant and faculty member in the finance department at Bentley College in Waltham, Mass. "Many businesses mistakenly under price their products attempting to convince the consumer that their product is the least expensive alternative hoping to drive up volume; but more often than not it is simply perceived as 'cheap.

" Remember that consumers want to feel that they are getting their "moneys worth" and most are unwilling to purchase from a seller they believe to have less value, Willett says. Businesses also need to be very careful that they are fully covering their costs when pricing products. "Reducing prices to the point where you are giving away the product will not be in the firm's best interest long term," Willett says.

Over pricing. On the flip side, overpricing a product can be just as detrimental since the buyer is always going to be looking at your competitors pricing, Willett says.  Pricing beyond the customer's desire to pay can also decrease sales. Toftoy says one pitfall is that business people will be tempted to price too high right out of the gate. "They think that they have to cover all the expenses of people who work for them, the lease, etc.

and this is what price it takes to do all that," he says. "Put yourself in the customer's shoes. What would be a fair price to you?" He advises taking little surveys of customers with two or three questions on an index-card-sized form, asking them whether the pricing was fair. Understand Your Other Business PrioritiesThere are other reasons to go into business. Understand what you want out of your business when pricing your products.

Aside from maximizing profits, it may be important for you to maximize market share with your product -- that may help you decrease your costs or it may result in what economists call "network effects," i.e. the value of your product increases as more people use it. (A great example of a product having network effect is Microsoft's Windows operating system. When more people began to use Windows over rival products, more software developers made applications to run on that platform.

)You may also want your product to be known for its quality, rather than just being the cheapest on the market. If so, you may want to price your product higher to reflect the quality. During a downturn, you may have other business priorities, such as sheer survival, so you may want to price your products to recoup enough to keep your company in business. How to Price Your Products: Factors to Consider "There are many methods available to determine the 'right' price," Willett says.

"But successful firms use a combination of tools and know that the key factor to consider is always your customer first. The more you know about your customer, the better you'll be able to provide what they value and the more you'll be able to charge."Know Your CustomerUndertaking some sort of market research is essential to getting to know your customer, Willett says. This type of research can range from informal surveys of your existing customer base that you send out in e-mail along with promotions to the more extensive and potentially expensive research projects undertaken by third party consulting firms.

Market research firms can explore your market and segment your potential customers very granularly -- by demographics, by what they buy, by whether they are price sensitive, etc.. If you don't have a few thousand dollars to spend on market research, you might just look at consumers in terms of a few distinct groups -- the budget sensitive, the convenience centered, and those for whom status makes a difference.

Then figure out which segment you're targeting and price accordingly.Know Your CostsA fundamental tenet of pricing is that you need to cover your costs and then factor in a profit. That means you have to know how much your product costs. You also have to understand how much you need to mark up the product and how many you need to sell to turn a profit. Remember that the cost of a product is more than the literal cost of the item; it also includes overhead costs.

Overhead costs may include fixed costs like rent and variable costs like shipping or stocking fees. You must include these costs in your estimate of the real cost of your product."Come up with X first. X is your cost of raw materials, labor, rent, and everything it took to make the product so that if you sold it you would break even," advises Toftoy. "Y becomes what you think you need to make on it.

That may depend on your business. Restaurants overall make about 4 percent, which is pretty low. If you want 10 percent then you factor that into your costs and that is what you charge."Many businesses either don't factor in all their costs and under price or literally factor in all their costs and expect to make a profit with one product and therefore overcharge. A good rule of thumb is to make a spread sheet of all the costs you need to cover every month, which might include the following: Your actual product costs, including labor and the costs of marketing and selling those products.

All of the operating expenses necessary to own and operate the business. The costs associated with borrowing money (debt service costs). Your salary as the owner and/or manager of the business. A return on the capital you and any other owners or shareholders have invested. Capital for future expansion and replacement of fixed assets as they age. List the dollar amount for each on your spreadsheet.

The total should give you a good idea of the gross revenues you will need to generate to ensure you cover all those costs.Know Your Revenue TargetYou should also have a revenue target for how much of a profit you want your business to make. Take that revenue target, factor in your costs for producing, marketing, and selling your product and you can come up with a price per product that you want to charge.

If you only have one product, this is a simple process. Estimate the number of units of that product you expect to sell over the next year. Then divide your revenue target by the number of units you expect to sell and you have the price at which you need to sell your product in order to achieve your revenue and profit goals.If you have a number of different products, you need to allocate your overall revenue target by each product.

Then do the same calculation to arrive at the price at which you need to sell each product in order to achieve your financial goals.Know Your CompetitionIt's also helpful to look at the competition -- after all, your customer most likely will, too. "Are the products offered comparable to yours?  If so, you can use their pricing as an initial gauge," Willett suggests. "Then, look to see whether there is additional value in your product; do you, for example offer additional service with your product or is your good of perceived higher quality?  If so, you may be able to support a higher price.

  Be cautious about regional differences and always consider your costs."It may even be worthwhile to prepare a head-to-head comparison of the price of your product(s) to your competitor's product(s). The key here is to compare net prices, not just the list (or published) price. This information could come from phone calls, secret shopping, published data, etc. Make notes during this process about how your company and products -- and the competition -- are perceived by the market.

Be brutally honest in your evaluation.Know Where the Market Is HeadedClearly you can't be a soothsayer, but you can keep track of outside factors that will impact the demand for your product in the future. These factors can range from something as simple as long-term weather patterns to laws that may impact future sales of your products. Also take into account your competitors and their actions. Will a competitor respond to your introduction of a new product on the market by engaging your business in a price war? How to Price Your Products: Deciding to Raise or Lower Prices One size does not fit all.

You can only go so far pricing all your products based on a fixed markup from cost.  Your product price should vary depending on a number of factors including: What the market is willing to pay. How your company and product are perceived in the market. What your competitors charge. Whether the product is "highly visible" and frequently shopped and compared. The estimated volume of product you can sell.

That opens the door to raising and/or lowering prices for your products. In order to make this call one way or the other, you should first understand what's already working. Analyze the profitability of your existing products, so you can do more of what works and stop doing what doesn't work. You want to find out which of your existing products are making money and which are losing money. You may be surprised at how many of your products are losing money -- fix those ASAP.

You should also constantly re-evaluate your costs. To sell it right, you have to buy it right. If you are having a hard time selling a product at an acceptable profit, the problem may be that you are not buying the product right. It may be that your cost is too high rather than your price is too low.When to Raise Prices -- and HowYou should always be testing new prices, new offers, and new combinations of benefits and premiums to help you sell more of your product at a better price.

Test new offers each month. Raise the price and offer a new and unique bonus or special service for the customer. Measure the increase or decrease in the volume of the product you sell and the total gross profit dollars you generate.It is a fact of life in business that you will have to raise prices from time to time as part of managing your business prudently. If you never raise your prices, you won't be in business for long.

You have to constantly monitor your price and your cost so that you are both competitive in the market and you make the kind of money you deserve to make."The best way to determine if the product is being priced correctly is to watch sales volumes immediately after making any change," Willett says. "This can be done by watching cash collections (if the business is cash or credit card based) or credit sales (if accounts receivables are used) for the weeks following.

If a price increase is too high, customers will react pretty quickly.  Also watching the competition can help - if you've made a positive change in prices; competitors are likely to follow suit."But there is a right way and a wrong way to raise prices. You don't want to alienate your existing customer base by raising prices too steeply, especially during a recession. "Rather than have a sudden increase, have a strategic plan over two to five years during which you gradually increase your price 5 to 10 percent," Toftoy advices.

"If the business is in trouble and you say, 'Hey, I'm going to mark everything up"¦ that kind of scares people away. This way you haven't gone from $5 to $15. You've gone to $7.50 first.""In terms of raising the price -- this is more easily accepted in 'good' economic times," Willett says. "As the underlying cost of producing the product rises, the customer is prepared to accept the rise in the price to them.

  If the customer perceives that the firm's costs are going down while their price is going up. This will not be received well and is likely to backfire."When to Lower Prices -- and HowYou may realize that you have missed your target audience by pricing your products too high. You can always choose to discount your products or give customers something for free in order to get them to try your product or generate traffic to your storefront or website.

"You have to get people in," Toftoy says. "People like getting something for free or some kind of discount. You can make Wednesday senior citizen day when seniors get a 20 percent discount. Then maybe you can offer a student discount day. Then all you're doing is keeping the price the same, but to those people you're giving them a cut but it's not like you've lowered all prices."Generally, lowering prices is not a good practice unless you are using this strategically to garner market share and have a price sensitive product or if all of your competitors are lowering their prices, Willett says.

"An alternative to lowering price is to offer less for the same price which will effectively reduce your costs without appearing to reduce the value to the customer," she says. "Restaurants have found this particularly helpful in terms of portion sizes but this same strategy can be applied to service industries as well."Monitor Your PricingAnother key component to pricing your product right is to continuously monitor your prices and your underlying profitability on a monthly basis.

It's not enough to look at overall profitability of your company every month. You have to focus on the profitability (or lack of profitability) of every product you sell. You have to make absolutely sure you know the degree to which every product you sell is contributing to your goal of making money each month. Remember: "People respect what you inspect."Here are some other practices to help you price right: Listen to your customers.

Try to do this on a regular basis by getting feedback from customers about your pricing. Let them know you care about what they think. Keep an eye on your competitors. If you don't have deep pockets and can't afford to hire a market research team, hire some college students to go out on a regular basis and monitor what your competitors are doing. Have a budget action plan in place. Try to have a plan for your pricing that extends out three to six months in the future.

You owe it to yourself and to your business to be relentless in managing your product pricing. Remember, how you set the price of the products could be the difference between the success -- or failure -- of your business. Related Links:Case Study: Finding the Right Price for a Hot ProductLuke Skurman's quirky college guides were a big hit. The problem was getting readers to pay. What if he gave the content away?Recession Pricing Strategies: How Low Can You Really Go?Tempted to cut prices? You're not alone.

The Price Is RightSetting prices has always been more art than science. New software aims to change that.The Right PriceToo many new entrepreneurs harm their own prospects by under pricing their goods and services. But if those company owners just take the time to think, they can set their prices closer to fair market value.Is It Time to Raise Prices?Boost your bottom line by taking the guesswork out of pricing.

Flexing Your Pricing MusclesDespite years of almost no inflation, you may have more pricing power than you think. Here's how to exercise it without bruising yourself in the process.Recommended Resources:The Art of Pricing: How to Find Hidden Profits to Grow Your BusinessBy Rafi Mohammedwww.rafimo.comThe author has a very interesting point about how to get out of the pricing "Catch 22" by adopting a multi-price mindset.

How to Sell at Margins Higher than Your Competitors: Winning Every Sale at Full Priceby Lawrence L. Steinmetz, and William T. BrooksNational Federation of Independent BusinessThis trade association for small and mid-sized businesses maintains a section on how to set prices, when to give discounts, and when to raise your rates, among other topics.U.S. Small Business AdministrationGovernment agency for small business matters operates a website devoted to market and price decisions that businesses must make.

Hazel Gordon

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