By: Evan Lyszczyk, Gadd Business Consultants
Determining how you are going to price a product can be difficult, especially when you are just starting out and have limited information on exactly how much it will cost you to make said product. There are some fundamental steps that you can take to ensure you’re pricing your product to not only be competitive with the rest of the market but also guarantee you’re at least breaking even.
There are several components to consider when determining the cost structure of your product. First, there are the direct costs, these are the expenditures that go “directly” into making the product. Your direct costs primarily consist of the material and labor that is required to make your end product. Furthermore, there are other operating expenses that are necessary to the production process but do not directly add value to your product, these are considered your “Overhead” costs. Your overhead costs could include items such as advertising, utilities, and insurance. To learn how to incorporate your overhead costs into a per unit value, follow this link – Click here.
Once you’ve determined your overall cost there are numerous different pricing strategies that you can use. Every strategy has it’s benefits and draw backs and determining what strategy best fits your company can depend on various different factors—both internal and external alike. Two of the more commonly used pricing strategies are; the cost-plus price strategy, and the competitive pricing strategy. The cost-plus price strategy is relatively simple to comprehend and implement once you have a firm understanding of what your total cost per unit is. In this strategy you take your overall cost of a product and add a desired profit margin. Moreover, the competitive pricing strategy—which is commonly used in highly saturated markets—states that your price is determined simply by what the competition is charging. In doing so, it allows you to stay relevant in a market that is flush with competition. However, depending on your operating expenses it may hinder your ability to generate a profit. For more pricing strategies and a further understanding of the strategies above check out this episode of Ken’s Corner – Click here.
Whether you’re starting a new business or selling a new product within an existing business, determining a viable selling price can be a difficult task. Even if you have existing products in an existing market, it is also important as the market and costs fluctuate to check to make sure your current pricing model is making your profit objectives. By following the few steps laid out above it can help shed light on not only an efficient way to determine the cost of your product but to also aid in determining the correct pricing strategy for your product.