3 Easy Steps for Pricing Your Products

As all of us know, the goal of having our own business is to make a profit. Well, you can’t do it if you don’t do your homework and price your product effectively. Pricing is the critical element to making a profit, but many micropreneurs have trouble knowing what to charge.

Do your Homework...

Before setting a price, you’ve got to do some research on your market, and there are many factors to take into account before you set your price.

Step 1: Do you have any competition? In your target market, what is your competition, and do they sell the same items as you? If so, you’ve got to figure out if you want to price above them or below them.

Price above? In some cases, YES! In my DIYM system, we talked about building customer loyalty. A LOYAL customer will fight to stay with you. How do you build customer loyalty? By providing knock-their-socks-off service; under-promising and over-delivering. When you have a customer base whose greatest conce
ISN’T price, you can price OVER your competition, by supplementing the product with service that they can’t get anywhere else. Use a marketing strategy of “you get what you pay for, and this is what I provide.” Make sure you know the product, so you can give them practical advice on how to use it, or try to carry exclusive merchandise to limit your competition.

Price below? If you have a client base whose greatest conce
IS price, then you’ve got to look for ways to price below your competition. Be careful, because the last thing you want to do is get into a price war with someone with the end result being you both get priced right out of business. Chances are, if you undercut them, they’ll turn around and undercut you right back.

Step 2: You've got to look into what your costs are.
Some tips:
-- Get the best price you can for merchandise from the supplier – and shop around to get it!nn-- Locate your business in an inexpensive area (even if it’s your basement).nn-- Keep a close eye on your inventory, and don’t overstock a slow-seller.nn-- Watch your variable costs (raw materials costs go up and down frequently)nn-- Keep a low overhead. Any cost that’s not directly tied to the product is overhead (heat, light, insurance, depreciation, etc.)

Step 3: Look for tricks to move merchandise, especially if you get a slow-seller. Try bundling items into kits. You can get item A only if you buy it with Item B for a special price. Make the customer think they’re getting something of a bargain.

Set yourself a pricing schedule

So how do you know what to charge? A lot of that can be determined on what your cost is and what kind of profit you want to make.

If yours is a brand-new business, you are going to have start-up costs, and these will need to be factored in. Then, you’ve got to take a look at materials for the product you’re going to sell and break it down to cost per unit. Then look at how may units you can make in a particular time period. Do you want to turn a profit the first year, or are you content to break even? What is your 5-year plan?

It’s a lot to think about.

Here’s a simple example:
Let’s say you want to start a business where you paint artistic scenes or patterns on decorative plates. Your start-up cost and overhead for your business is $50,000. Now let’s assume that it will cost you $7.00 per plate in time and materials. You estimate that you can make 8,000 of them each year. Your cost for them will be $56,000, and your TOTAL cost will be $106,000 for year one. If you want to break even, you will need to charge $13.25 per plate to cover your start-up costs and material costs.

So now you can look at your competition. Let’s say that a competitor can mass produce decorative plates into the market at $13.00 each. You can OVERPRICE them and charge $15.00 per plate. What’s your hook? Yours are HAND-MADE! You end up turning a profit of $1.75 per plate or $14,000 the first year. Most people will pay the extra $2.00 for something special like a hand-made item.

Next year, if you do some checking, you find that you can get a better deal on plates and reduce your cost per item to $5.50. You keep your price at $15.00. Since your start-up costs were covered in year one, your total cost for year two will be $44,000 for 8000 plates. Your sales will total $120,000 and that gives you a year-two profit of $76,000 if you sell out everything.

Not a bad chunk of change.

Another very important thing to remember is that if your pricing model isn’t working; don’t be afraid to change it. You need to constantly review your costs, your charges, and your competition. Raise or lower your prices if and when it becomes necessary, either due to supply vs. demand or to keep pace with a close competitor. And remember, if you raise your prices, don’t ever apologize for it, it’s part of doing business. Customers may get angry, and you may lose a few, but in the long run it’s a necessary evil, and most will understand.