How to Price Your Product or Service Strategically

How much you should charge for your product or service is a decision that every entrepreneur must make. There is no single formula that can explain how to price it, and experts have varying opinions on the matter.

According to our research, pricing is more art than science. In this post, we’ll walk you through the various steps that you can take to figure out how to price your product so that you can make an informed decision.

How to Price a Product or Service for Your Business

It can be very time-consuming to figure out how much you should charge for a product or service, especially if you're new to small business marketing. Setting the right prices is very important, as they will play a huge role in your sales and how much you can earn.

Although it may be a little different depending on the type of business that you're running and the products that you're selling, these six steps should help you get started.

Step 1: Evaluate the cost

The first step in establishing the right pricing for a product is to determine how much it costs to make and provide the goods or service that you're selling. This is because, if you don't have the necessary funds to cover your expenses, you can't turn a profit. Expenses fall into three categories: labor, overhead, and materials.

Let’s break down each component

Raw materials are the components of a production process. For instance, if you're making clothes, your materials might include thread, buttons, and cloth. If you're providing a service, then your costs might include materials that are required by the industry. For instance, if a janitorial business requires cleaning supplies, your materials might include buckets, mops, and other similar items.

Although it may seem like a simple process, determining the cost of materials can be challenging. For instance, if you're a tech company, you might have to consider the value of your equipment. Or, if you sell technical components, such as computers, your equipment might fall under the category of materials. On the other hand, if you provide a service, such as by using computers, then your equipment might be under the overhead category.

The labor measure is used to determine the amount of physical and mental resources that are needed to create a product or service. Whether it's a worker on the factory floor or a receptionist in your office, your company's labor calculation might include people who contribute to the business.

Besides salary, other costs associated with labor include retirement plans, health insurance, and taxes for Medicare and social security. You should also include these expenses in your calculations.

One of the most important factors that you should consider when it comes to calculating the cost of labor is the time that you spend investing into your business. Many entrepreneurs underestimate the amount of time that they spend on their services. One way to minimize this error is to keep a record of all the steps that you complete daily.

Before you start working on a project, take a step back and analyze the amount of energy and knowledge that you're required to complete. You'll be surprised by how much of your expertise and knowledge you can contribute to the business.

If you're looking for an objective analysis of your company's labor costs, the Bureau of Labor Statistics can help you compare the average price of labor in different industries and geographical areas. This tool can also help you determine if your costs are in line with those of other businesses.

An overhead expense is a catchall term that refers to expenses that aren't covered by labor or materials. These expenditures can be either fixed or variable.

Regardless of whether your company is in the red, fixed overhead costs are the expenses that you have to pay every month. These include rent, insurance, depreciation, and salaries. Some taxes are also variable depending on the revenue.

On the other hand, variable overhead expenses are expenses that can vary month to month due to factors such as fluctuations in profit and seasonal changes. These include travel, office supplies, and marketing.

This expense category includes the one-time expenditures that are typically required for starting up. These include equipment purchases, security deposits, and licenses for local and state governments. To determine variable expenses, use an average monthly figure.

After you've calculated each of these expenses, you can then add the numbers together to come up with a total cost of output that's appropriate for your business. This number will allow you to make a profit from your product.

Step 2: Determine your desired profit

The goal of this calculation is to determine how much above costs you'd like to make per unit or per customer. It can also be calculated as the percentage of revenue that's profitable once you deduct all your expenses. Although this method can be very arbitrary, you can still look to professional associations for guidance.

Step 3: Understand your customers

After you've calculated your desired profit and costs, you'll then need to think about the factors that will motivate your target audience. This information will play a huge role in how you price your products.

You can hire a research firm to gather information about your potential customers. You can also collect this data through your social media and personal networks. For instance, conducting an informal survey in person with colleagues or customers can provide you with valuable information.

You can also use Google Surveys, SurveyMonkey, or Facebook Analytics to gather data about your potential customers. These three simple tools can help you aggregate and compile statistics online.

To help you gather more information about your customers, here are some questions and topics that you can ask. These will allow you to better understand them and determine what they'll pay for your services or goods.

· Competitive Intelligence: The goal of competitive intelligence is to find out what your customers' favorite products and services are.

· Demographics: You want to know your customer age, gender, and income status to understanding their buying power

· Budget Awareness: When it comes to making a purchase, your customers' priorities are usually focused on the price or convenience of your product or service. They also consider other factors such as the unique features of your goods or service.

· Motivation: The brand name of the item is also a crucial factor that your customers consider when making a purchase. This can be ranked from one to 10.

· Psychology of Money: A psychological susceptibility test can also be used to determine if your customers are more likely to buy a product if it's priced at $9.97 or $10.

The answers to these questions can help you determine if your customers' primary concern is cost, comfort, luxury, or feature set. If they prioritize cost, you can offer various types of products and services that are tied to a certain price point. On the other hand, if comfort is of the utmost importance, you might want to emphasize the facility's amenities.

If your customers prefer a robust set of features, then subscription-based pricing might be the best option. But, if they're all about prestige, you should refrain from pricing your product too low. Customers who value prestige associate the price of an item with its quality.

Step 4: Research the competition

After you have identified the priorities of your customers, it's easier to distinguish yourself from the other potential competitors. For instance, who offers a product or service that's similar to what you're offering?

Analyzing your competition will allow you to determine how much you should be charging for your products. Although you won't want to copy and paste what your competitors do, this will give you an idea of how you can develop your own.

Conducting a competitive analysis is also done through an online search. This method will allow you to collect valuable data that you wouldn't find on a company's website. You can keep up with the latest news about a company or industry by using Google Alerts. Or you can use Google Trends, which displays the popularity of various search terms and their locations.

This tool can help you evaluate the direct competitors of your rivals. Follow the social media profiles of your potential competitors. You'll be able to learn about their marketing strategies, as well as their target demographic. Also, keep in mind that they may have a large online following, especially when it comes to pricing.

Step 5: Monitor your prices and adjust with the market

Before you start selling your products, you should have all the necessary information to make informed decisions regarding the prices of your goods. You can also choose to implement multiple pricing strategies for different types of products.

Although you have successfully priced a product, it’s important to keep in mind that this doesn’t mean that the pricing process is over. It’s still possible that you might set different prices for different products in the future.

You should also regularly monitor the sales and prices of your products to ensure that they are not affected by the changes in the market. In addition, you should keep an eye on your expenses to ensure that they are not increased significantly.

You should also keep an eye on the public perception of the product, as it can change for any reason. This can indicate that you need to reevaluate your pricing strategy.

To wrap it all up

Learning how to price a product can be a fluid process. Although it can be challenging, the best thing you can do is take it one step at a time. Before you start selling your products or services, it’s important that you thoroughly research the various factors that affect the price of your goods. In addition to this, it’s also important to keep in mind that you should consider the possible profits that you can make from the sale.

It’s also easier to set a lower price than to raise it, as the market will quickly adjust to your strategy. If you overshoot your mark, the market will quickly correct you. Whether you are a seasoned veteran or a new entrepreneur, your ingenuity and hard work can be worth more than you realize.