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How to Decide the Price of your Products
Sep 18, 2020 | 06 min read
2. Factors to consider in how can you price your products
The following are the key factors that should be considered while decking the pricing of the products.
Variable Cost (per product)
Most importantly, you want to recognize all expenses getting in the production of every item. You will have to find how much each unit cost for you and what will be your total cost for the product.
Perform an analysis of the raw materials that you use in production. You can calculate the cost of your raw materials, all expenses, packaging cost. Then you will get an idea of the rate of your product that can be sold per item.
Hence, remember the effort, and the time you gave to your business. To value your time, set an hourly rate you need to obtain from your business, and afterward separate that by what number of items you can make in that time.
Here’s a pattern listing of prices for every product
| Cost of products sold | $3.00 |
| Manufacturer time | $3.25 |
| Cost of Packaging | $1.50 |
| Promotional materials | $0.75 |
| Shipping rate | $4.00 |
| Commissions | $3.00 |
| Total per-product cost | $15.50 |
|---|
In this model, your complete per-item cost is $15.50. Using this process you can fix the variable rate for each product.
Know your Customer
Undertaking a type of statistical surveying is fundamental to becoming more friendly with your client because the more you know about your customer the better you will be able to provide what they need. This kind of survey is performed on your current customer base. The market research firm will tell you about your potential customers and explore your market.
Market surveying firms can investigate your market and section of your potential clients on the points such as – social economics, what they purchase, whether they are cost-sensitive, etc. If you don’t want to spend money on the market research then just observe and perform analysis on the consumers. And figure from your observation which group of customers you want to target and accordingly set the price of your product.
At some point make sense of which section of customers you’re focusing on and rate accordingly. Survey data will assist you in deciding whether your cost is correct, what level of administration or incorporations you ought to offer and lastly if you are focusing on the correct market. Sometimes it might be you have to change your market to make your business more beneficial.
Profit margin
When you have a complete number for your variable expenses per item offered, it’s an ideal opportunity to decide your profit margin. Let’s say you need to earn a 20% earnings margin over your variable costs. After fixing this percentage, do not forget the two major points as follows:
- You can set the actual rate of your products beyond your variable costs.
- In case if you set 2x the price of all of your competitors, then you may discover some difficulties for selling your items.
When you are prepared to compute a cost, take your total value of expenses, and divide them using 1 minus your ideal net revenue, communicated as a decimal. The 20% profit margin will be 0.2, so divide your variable costs by 0.8.
The formula will be:-
Target Rate = (Variable price) / (1 – the profit margin you want in decimal)
In this example, Target Rate = 15.50 / (1 – 0.2) = 15.50 / 0.8 = 19.The above method fin pout the base rate for your product is $19.37 that you can round up to $20.00.
Competition
It’s also useful to study the competition – after all, your client will do this, as well. Are your competitors selling the items similar to yours? If so, you could use their pricing as a preliminary step. Also, you can offer extra service together with your product, or is your item perceived better quality? In this case, you might have the option of setting a higher cost for your products. Be cautious about your competitor’s differences and always consider your price.
Observe on the points like What group of customers they are targeting, How is their position in the market, What are they costing for different kinds of services and products. The answers to these points will provide you the valuable benchmark for your costing. You have to gather all this information through secret shopping, phone calls, publish data, etc.
Revenue Target
You should have your income target for the profit you want your online store to make in the particular year. Take that sales target, calculate the costing for production, marketing, and promoting your product and you will get the cost of per product. If you have only one product for sale, then this will be an easy process. Then divide your sales target through the number of units you assume to sell and you have the rate at which you need to promote your product in the order it will accomplish your sales and earnings desires.
If you have various kinds of products then fix your revenue target on each category of product. Then do a similar calculation to reach on the rate at which you have to offer every item so as to attain your financial objectives.
3. When to Raise Prices
In the life of any business raising the price from time to time is an important factor. If you don’t raise the prices of your products or services you won’t be able to grow your business. Test for the new offers, special bonus, or special service every month for your customers. Remember in the event where a rate increment is excessively high, the client will react quickly as asking with many doubts such as why the prices are fixed so high, is the quality of products increases, or is there any major changes that have happened, etc.
Avoiding these all doubts, remember there are a correct way and an incorrect method to raise costs. Rather than having an unexpected increment, have a plan over two to five years during which you slowly increment your product rate with 5 to 10 percent. So, don’t go directly from $10 to $20 value. Go to $12.50 first. So that consumers are prepared to accept the rise in the prices for them.
4. When to Lower Prices
You will observe you are losing your potential customers when you raise your product cost. But lowering your product rate is also not a good practice for your business. The easiest alternative for lowering your product cost is to offer special discounts or unique offers to your customers. You don’t have to offer discounts on your store every time. You can apply strategies such as plans to offer special discounts on specific products only on each Wednesday to a particular group of customers. In this way, you are not lowering your prices just giving some discounts.
5. Summary
Always keep in mind that setting the cost of products or services will decide the success or failure of your brand. The most significant thing in terms of rate is that your rating encourages you to fabricate a sustainable commercial enterprise. When you have that, you can dispatch your store or your new items and utilize the reviews of your customers which you get on the costing methods that will help you.
