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Setting Product Prices: How-Tos and Factors

You might be new to business and are at a loss on how to set the selling prices for your product(s). There’s a balance that needs to be achieved between thinking of profits and the buyer’s impressions, and that’s why correctly setting product prices is so important for your branding. We’re here to help you with setting product prices and the factors you need to consider when doing so. Stick around and you’ll see how simple all of it can actually be.

Setting your product prices

Business owners packaging items

Calculating how much your product is worth in monetary terms isn’t particularly hard. There are just some things you have to consider about your own money or investment that you’ve put into your product. It’s as easy as:

1. Adding up your variable costs

You’ll be spending money to get money. Variable costs are all the things that you’ve paid for and all the costs that it took to get your product out there. 

If you have your own hand-made products, you’d have quite a number of things to look into. These include the raw materials, labor costs, overhead costs, and even the time you spend. Bundling these things together and how many products you can make will help gauge an estimate on the unit cost of your item.

Bundling these things together and how many products you can make will help gauge an estimate on the unit cost of your item.

But if you have a simpler business model, say dropshipping, then you won’t have quite as many things to put into consideration. If what you sell are products from other brands or manufacturers and order them upon customers’ purchase, then all you would really need to account for are the shipping costs and packaging (if any).

2. Adding your desired profit margin

Research notes that the average gross profit margin for retail is 53%. So deciding on yours should be around that mark or even lower – whatever you think is best. 

Target Price = ( Variable cost per product ) ⧸ ( 1 – desired profit margin in decimal )

Up to this point, there are still a couple of things we haven’t gone into yet. These being your fixed costs – which cover things beyond the variable costs, and how you’d still need to see the overall market and what price range would still be “acceptable” for consumers.

3. About those fixed costs

Fixed costs are expenses that you pay for no matter what, and as they’re an important part of running your business, usually your sales will cover them. While it can be a bit uncertain how exactly to incorporate fixed costs into your pricing, you can use online tools like a break-even calculator.

A break-even calculator can help you see how many items you need to sell to break even at your chosen selling price. To make your life easier, there are also product pricing calculators that you can find that – as the name suggests – help you find the right price for your products.

Other factors when setting prices

Bakery owners displaying their pastries

There are other factors at play before you’re really done setting your prices. At times, these factors can make the process of calculating and pricing your products a bit more tedious and nuanced. But they’re important to consider regardless.

Understand the market

Whatever it is you’re selling, your products will tug your brand into a specific arena or market in the e-commerce industry. The wrong prices can be detrimental to your business. So, when you’re working to research the market:

1. Know your customers

Price is of course a priority for consumers. A less-than-decent pricing strategy could be a deal breaker for your customers. So know what your target audience wants. Prices are your product’s first impression in number form. Too low and they’ll brand your products low quality.

2. Scan the competition

It’s a very high possibility that you’re not the first person to sell whatever it is you’re selling. You’ll be having competitors before you even go live. But they can be a source of info on the proper pricing for your products. If the best you can do is price your products roughly around theirs, hence not being all that effectively competitive price-wise, then try adding more value to your service and experience.

Monitor your pricing

You won’t be sitting on the product prices you decide on today, forever. The commerce environment constantly changes. Changes that will affect profit margins and sales goals. Some annual budgeting can help you see the shifting costs of your operation and where you need to hike up some expenses and final price points.

This also connects to the first point on knowing the market. There’s no reason why you shouldn’t raise prices if your competitors are. But it is good practice to inform your customers of the price hike and the whys. Such communication and care can be really appreciated 

Goals, targets, objectives

While it’s good that you care for buyers’ concerns, you still need to put your business as the priority. The prices you decide are worth the value of your products and how you come about settling on that front has to coincide with your business goals and focus/focuses.

You can prefer high prices with low-volume sales or you could desire low prices with high-volume sales. Maybe your priority is brand perception and how your brand is perceived by the community.

These different objectives in running the business will lead you to different paths and business practices. Money-wise, they also determine where you’ll spend more on your capital and costs.

Getting prices right

A woman selling clothes online

Reaching the optimum product price and pricing when running your business, which manages to attract customers and conform to your ambitions is very important for a long-lasting brand. And to be long-lasting, your prices have to be competitive enough alongside your products’ worth in value so that your brand awareness continues to climb.

Aiman Ammar

East Coast boy. Writing friendly reads and providing a gentle hand to guide readers through learning new things.

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