How to Price a Product

How do you actually price your product?

Everyone’s business is different, so the steps you’ll need to take will vary for everyone. Use the steps below as a guideline to help you get started with a baseline and remember that you can always change your prices as your business grows.

1. List and identify the cost to start your business and then estimate your total startup costs

2. Calculate the cost of goods sold. Cost of goods sold (COGS) can be calculated by multiplying how much it costs to make each good or service by how many of those goods or services you've had to make.

   • Manufacturing costs, including materials

   • Design cost

   • Estimated overhead costs

   • Your salary

1. Research the competition and learn how much they are charging

2. Select a pricing strategy, the most common ones are cost, competition and customer-value based pricing.

   • Cost based pricing: Include costs like from materials, what you pay your employees, and the value of your time. Make sure your unit price is more than how much it costs to make one unit of that offering. Pricing decisions are based on data, in order to get a certain return on investment or a certain markup on costs. Typical examples of cost-based pricing approaches are cost-plus pricing, target return pricing, markup pricing or break-even pricing. The main weakness of cost-based pricing is the willingness of consumers to pay and that competitive price levels. The main advantage of this approach is that the data you need to set prices are usually easy to find.

   • Competition based pricing: Understand what your competitors charge and whether it makes sense to charge more or less for a similar offering. Pricing is based on competitive price levels or on anticipated or observed actions from competitors. The main advantage of this approach is that the competitive situation is taken into account, and the main disadvantage is that it disregards the customer’s willingness to pay.

   • Customer-value based pricing: This approach takes into account actual and potential customers - they are the primary driver in setting prices. Customer value-based pricing approaches are driven by a deep understanding of customer needs, of customer perceptions of value, and of customers’ willingness to pay. The advantage of this approach is that it takes a customer-centric approach. Th and the main disadvantage is that data on customer preferences, willingness to pay and size of different market segments are usually hard to find and interpret.
     
     

3. Select a product price

4. Estimate your cash flow to make sure your business will be profitable.

   • A cash flow refers to the net amount of cash and assets being transferred into and out of a business. A cash flow statement can be used to estimate your expected net profit or how much money you will actually make.

Why is pricing your product important?

Your product price will ultimately determine your net profits, or how much much your business actually makes. At the end of the day, profitable businesses thrive and all others fail.

Pro Tip

Sometimes, you may hear complicated buzzwords, like ROI (Return On Investment), but they’re just used to explain pretty straightforward concepts like how much value you get out of what you put in. You want to make sure you’re running a profitable business, so you’d want each sale to bring in more money than it costs for you to make the sale. Get the low-down on financial buzzwords here.