The dilemma of determining the price of a product has been perplexing humanity for thousands of years. Even before the modern currency was invented, people valued different products according to different standards.
It’s believed that the first humans to introduce currency were the Mesopotamia tribes back in 6,000 BC in the form of bartering. It didn’t take long for the Phoenicians to start bartering across the seas with other nations.
Babylonians exchanged many goods for weapons, food, spices, and other essentials. Coins first appeared in China and then on Lydia (today’s Turkey). The barter system back then had also problems with determining the value of goods sometimes, as it can be confusing, depending on who you’re selling to.
Nowadays, determining the price of something isn’t that easy either. The involved processes of manufacturing used to create a product are quite variable, and the value of a product may still fluctuate easily. Countries still use bartering systems to these days in international exchanges on a mass scale for mutual benefits, by signing multilateral or bilateral trade agreements.
The problem you’ll face when you’re setting a price for your product is one that requires a bit of economic finesse. Price the product too high and people will look for your competitors and avoid buying from you. Price it too low and it will be assumed that it’s low quality and you end up with thin profit margins. Here is our guide to help you find the right balance to pricing your products before your store’s launch.
? Pricing strategies are many, but experts are recommending these 14 pricing strategies for your e-commerce business.
Product Pricing Definition
Usually expressed in monetary, the price is the translation of the compensation that one party is willing to give to another in return for the sale of a good or service. The price measures the market value of a transaction and is one of the essential elements.
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How to Calculate Selling Price of a Product?
The price formation mechanism is one of the central concepts of microeconomics, especially within the framework of the analysis of the market economy, where prices play a developing role in the research and definition of a so-called “equilibrium price” (whereas they play a more minor role in an administered economy).
The possible price levels are potentially infinite in number, according to economic actors, and their estimates of the product value for themselves and for others (by speculation). If a transaction actually takes place, the price reflects the compromise between the buyer’s estimates and those of the seller (reflection of supply and demand).
Pricing Mechanism Can be Affected by Other Factors:
- Possible imperfections in the market (monopoly, oligopoly, shortage, black market, etc.),
- Legal constraints, when they exist. Prices are not always arbitrary; some countries have them enforced or administered
- Technical considerations, such as the marketing method (over-the-counter, auction, stock exchange, etc.) or other constraints that imply (deadlines for transmission of offers, definition of priorities between offers, etc.).
The Initial Obstacle
Your store’s creation and obtaining your products may have been smooth sailing until now, but once you start thinking about pricing your products, you’ll probably freeze for a bit. Pricing is one of the essential pillars of any store in the world; it’s tangible with everything that has to do with your business, from investments to workers’ wages.
You need to assess your product on more than one layer: one-time purchase, very specific niche, seasonal or trending product. You don’t really have to overwhelm yourself thinking that it’s a one-time thing that ties you down. A product’s price can always change after launch and some strategic marketing ploys play it to their advantage to get the word out by introducing a very low price that gradually rises after creating a formidable customer base.
You need to establish that your product’s price is what keeps your business afloat. A low price that is cutting deeply into your profit margin is going to make its sale unsustainable while hindering your chances for growth by absorbing resources unnecessarily.
Your competitor’s price is also another complex situation where you’re forced to remain within the boundaries set by the market. These worries are important to help guide your price establishment but they’re not the main pillars that formulate your price.
How to Calculate Variable Cost per Unit?
You may opt to product pricing calculator. But, calculating variable costs is one of the most intuitive steps in understanding the basics of pricing your products. Essentially, it’s a breakdown of all the costs involved in getting your product on a shelf or even in front of a door. If your business model is a simple retail selling (order products from third-parties and then reselling it at a price offering you a good profit margin) then you won’t have to dig too deep in understanding the retail pricing formula of a product from a manufacturer’s point of view.
How to Price Crafts and Things You Make to Sell?
Making your own products means that you’re using raw materials, which costs. You’ll need to group the raw material you use and try to get an accurate estimate of how much raw material creates how many products; this is called the cost of goods sold per product.
The raw material is one thing, the time you spend on the conversion process is another. You’ll have to put a price for the time you spent making the product. The cost of your time is up to you and it can be variable, but be sure to incorporate it into your list of costs like: cost of raw materials, packaging, promotions, packing, and shipping. You can even set an hourly rate of the profit you’re expecting to earn and distribute it on the number of products you can make to find the best price.
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What Are Fixed Costs?
While variable costs are very important in determining your product’s price, fixed costs can’t be ignored. These costs are almost constant whether you’re mass-producing or producing it per order. Fixed costs have to be included in your plan and should be paid by your sales. You’ll have to think about how many products you need to sell to break even and start making a profit while including fixed costs in your calculations. This should help find a great balance between making a profit and staying competitive in the market.
What Is Profit Margin?
Once you know the exact range of variable costs of producing your products on more than one timeline, you should move on to integrating profit in your prices. Don’t forget that whatever industry you’re operating within, the market also has a saying in determining your price.
The profit margin isn’t usually very high at first, because the public would find it difficult to accept if your products cost twice as much as your competitors’. Even if you promise substantial-quality, a very high launching price can damage you, unless you are in an obscure niche market. To obtain the price after deciding on a profit percentage, simply add the percentage on top of your variable costs.
How to Price a Product for Retail?
Although there is a retail price calculator, it is normal to take a lot of time to decide your launching price, but don’t let it make you too hesitant to see the bigger picture. Your calculated price for launching isn’t going to be a constant price, it’s specifically made to evolve along with your shop. Once you make sure you got the essential formula of your pricing which covers both your expenses and profit margin, it’s time to see how it works with the market.
? There are other methods to win customers back to your store other than low prices, here’s everything you need to know about customer loyalty programs.
This strategy is considered a win-win because if it works and you sell a lot of your products then your pricing scheme was great, but if it fails to deliver what you were expecting, then you can readjust and customize it to fit with the feedback of your customers and the overall pulse of the market.
Product Pricing Example
As an example of the above methods, and to address the question of how to price a product, let’s take this furniture manufacturer who produces a model of bedroom furniture at a direct cost price of $ 1200 (which should include wages). He adds to this price a fixed charge of 15%. He hopes to increase his sales next year in order to hire two new employees.
(1200 × 0.15) + 1200 = $ 1,380
To expand his operations, he estimates that he needs to make a 5% margin on all sales. He must therefore sell his product for $ 1,449.
(1380 × 0.05) + 1380 = $ 1,449
This is the simplest formula to calculate selling price of a product, based on cost and the anticipated profit margin.
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This step shouldn’t be taken only after launch. Try your best to gather information from customers on what they really want and the prices they find fair and the prices that they are repulsed from. You can use emails to ask your existing customers about their opinion and whether they find something wrong with the price and why. Market research is a bit costly, especially when you’re still launching your online store.
Try to stick to social media and surveys to get a good feel for how your target audience feels about your prices and perhaps adjust them accordingly, if possible, while still maintaining a profit. Sometimes reducing your price can exponentially increase the number of sales so always try to find a balance.
Whichever prices to take-off your store with, be confident about your ability to turn the tides whenever the need arises. You should indeed worry about calculating the best price for launching your products, but you shouldn’t make it a life-or-death issue. Understand that the initial price is subject to change, according to numerous factors in your market. The more you relate to your customer’s perspective, the more comfortable you’ll be with the price.
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Do Not Do This While Pricing Products
Do not forget that selling at a loss is prohibited, so be careful if you decide to set a low selling price to sell a stock, make sure that the overall sales will cover and monetize the thin profit margin.
To Sum it Up
Setting a price for a new product is a hard process and can be performed according to two guidelines:
- Price skimming.
- Initial “penetration” pricing.
There are five vital factors to consider when deciding a price:
- Prospective and possible demand.
- Production costs vs. selling costs.
- Market targets.
- Promotional strategy.
- The right channels for distribution.
However, the conclusive decision cannot be achieved by any one-for-all formula; precise estimates lead to more successful pricing process, but combining other factors requires prudence.
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