You have created the perfect product, and it is time to put the price tag on it. A perfect product doesn’t guarantee profits, the right price decision does. How do you do it? It takes time and effort to decide the right price for the products that your business needs to sell.
Let’s take a look at the steps to determine the right price for the products.
# 1. Start with market research
If you don’t know your customers, you can’t create a product that works for them. Your product would only be successful if you address a certain need of the customers or add something to their lives.
You have two points from where you can start; you can make a valuable product and charge a high price or you can make an average product and charge a low price. In the first case, you would have a limited market; in the latter, you would have a mass market.
When you specialize in a certain niche, the market you target is small. You can make profits based on the high price of the products. On the other hand, if you choose the other way, you may benefit from the increase in sales to a larger market.
Whether you try to observe and understand the consumer perception and behavior on your own or appoint a full-service agency to complete the task, adequate market research is important before you decide on the price of the product.
# 2. Calculate production costs
The sum of money you spent on the manufacture of your product includes the price of the raw materials, the labor costs, the equipment and other direct costs. However, this is not all.
You also need to keep in mind the indirect costs. Technology costs, administrative costs, employee costs, sales and marketing costs and many other costs are involved in a business that you need to take care of.
It is important that you consider every element of the direct and indirect costs. Only a careful calculation of all elements can ensure that you have a clear idea about the amount you spend for each product.
# 3. Identify the pricing that works
A $100 Seiko tells the time. A $50,000 Rolex does the same. What makes a customer buy a Rolex then? The premium pricing strategy works when a business offers luxury products reputed for their status.
There is no one-size-fits-all pricing model for businesses. You need to find the pricing that works for your products. Pay careful attention to what your products do for the customers and how you can use the best pricing method to enhance sales.
One strategy that works is to offer different variations of the product with different prices to cater to different market levels. For example, if your business manufactures USB drives, offer them in 2GB, 8GB or 32GB capacities to serve different segments.
Another way to make it work is to bundle related products and sell them at a price lower than what the customer pays for the individual elements separately. This may reduce the price of each but increase the overall sales of the products.
# 4. Evaluate your competitors
Who are your competitors? What prices do they sell their products at? When do they change their prices? Even if you have a novel product, others would soon follow suit; therefore, you need to be aware of your competitors.
The general rule of thumb is to evaluate your competitor’s product and increase the price if it is low-quality compared to your product. Again, you need to reduce the price of your product if the competitor’s price is of a better quality.
However, nothing works in the same way for two businesses. While it is not a good idea to follow your competitors, you need to keep track of their product prices. You need to modify the prices at opportune moments to stay ahead of the competitions.
# 5. Keep track of the market
When does your customer need your product? Is it for a month, a year or always? It is important that you decide the price of the product based on the way you want the customer to purchase it.
Promotional offers may also help you keep afloat during the difficult times. However, it is best not to lower prices during recession; it would be quite difficult to get back to the original price once conditions improve.
You cannot predict the market conditions but it is important that you are aware of the past and present to understand the possibilities for the future. You need to have a plan in place to handle the changes in the market conditions.
Product prices must be based on your knowledge of the market, the customers, and the quality of the product as well as the experience of the customers. Pay attention to all factors that affect these elements before you put the price tag on the product.
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