There’s no one correct answer when it comes to pricing your product. It all depends on factors like your manufacturing costs, the target market, and overall demand for your product.
A mistake that most businesses make is either underprice or overprice their product. Underpricing can leave you in the red, while overpricing can turn away potential customers.
To find the sweet spot, Ian Mausner says you must research before developing a pricing strategy that works for your business.
Factors That Make Up Your Product’s Price
Variable Costs
The first step in pricing your product is to calculate your variable costs. This includes the cost of all the materials and labor needed to produce one unit of your product. Once you know your variable costs, you can add the desired profit margin to create a retail price.
For example, it costs you $5 to make each widget you sell. You want to earn a 20% profit margin, adding $1 to your variable cost to get a retail price of $6 per widget.
Profit Margin
Your profit margin is the percentage of your selling price that is profit. To calculate it, divide your desired profit by your selling price. For example, if you want to earn $100 in profit from selling 100 widgets at $6 each, your profit margin would be 16.67%. In this case, your desired profit ($100) is 16.67% of your selling price ($600).
Fixed Costs
In addition to your variable costs, you also have fixed costs. Fixed costs remain the same even if you sell more or less of your product. For example, if you have to pay rent for your store, that’s a fixed cost.
When pricing your product, Ian Mausner says you need to ensure that your selling price is high enough to cover both your variable and fixed costs. Otherwise, you’ll lose money with every sale.
To calculate your break-even point, divide your total fixed costs by your profit margin. For example, if you have $1,000 in fixed costs and a 20% profit margin, you would need to sell $5,000 worth of widgets to break even.
Once you know your break-even point, you can price your product accordingly. You’ll need to charge more than your break-even point to earn a profit.
Test the Market
It’s a good idea to test the market and see what prices customers are willing to pay. Ian Mausner says you can do this by surveying your target market or offering a limited-time discount.
For example, let’s say you survey 100 potential customers and find that the average price they’re willing to pay for your widget is $7. This means you could charge $7 and still make a profit.
You can also experiment with different pricing strategies to see what works best for your business. For example, you could offer a discount for bulk purchases or tiered pricing (e.g., $5 for one widget, $4 each for two widgets, etc.).
Experiment With Pricing
Ian Mausner believes the best way to find a pricing strategy for your business is to experiment and see what works best. Don’t be afraid to change your prices if you’re not making enough profit. And always keep an eye on your competition to see how they’re pricing their products.
Final Word
Pricing your product is a vital part of running a successful business. You need to ensure that your profit covers all the costs you paid out of your pocket. Just remember to take your time, research, and test the market before settling on a final price.
