How to price a product when starting a business

Key takeaways

• Your pricing can be affected significantly based on where you plan to sell products
• Know yourvariable costsandfixed costswhen deciding on pricing with outside vendors
• Customer personas keep you on track by reminding you of what your customers care about most

One of the trickiest parts of starting anew businessis determining how to price your product.Product pricingis a delicate balance. If youset yourproduct pricetoo low, it can negatively affect yourprofit margin. But if you set apricethat’s higher than what yourcompetitors charge, you can lose out onsales.

Everysmall business ownershould domarket researchbeforesetting price points. While thecost of goodscan seem like simple math, consumer behavior is more than just a numbers game—there aremany other factors at play. Yourpricing structureshould consider human behavior as well as business costs.

With that in mind, this guide offerscommon pricing strategieson how to price a product for the maximum return.But before we talk numbers, let’s review some basics.

Questions to ask before pricing a product

之前挑出你的价格范围new products(or changing the price on a product that already exists), it’s essential to answer these questions about your business:

• Where are you selling? Is it only at a physical location or do you also have anecommerce business？
• Are you pricing a product or service?
• Who is your targetcustomer base？你是在豪华或预算部分吗?还是一个mix of the two?
• What is theproduct costto get your goods in the hands of customers?
• Who are your main competitors that sellsimilar products？

Once you establish where yoursmall businessfits in the broader marketplace, it can help you determine the rightpricing model.

4 tips on how to price a product

When you determine the rightproduct price,you set yoursmall businessup for success. It means you can sustain your business by making your customers happy and boosting yourbottom line—here’s astep-by-stepapproach.

1. Invest inmarket researchactivities

Market researchis how you gather information about your customers. It can include focus groups, surveys, social listening (i.e., monitoring what your customers say online), data analysis, and paying close attention to the competition—not just what they’re doing but also their results.

Excellent market research and branding allows you to achieve an ingrained familiarity with your audience. When your company name or product is mentioned, the goal is to create a positive feeling or association. You also want your brand to be the first thing someone thinks of when they think of your industry or offerings. For example, think of how many people refer to all facial tissue as Kleenex or all cotton swabs as Q-Tips. These brands are so familiar that their names are used more often than the generic item names.

Researching and listening to what your customers value most—and least—in your product can help you choose the right marketing strategy to reinforce brand loyalty. When customers are loyal to a brand, the price is much less of a factor.

2. Know where you’ll sell your products

Your pricing will be affected byfixed costsandvariable coststhat you incur from running yoursmall business. Here’s a quick breakdown of what these terms mean:

Fixed costs:A fixed cost is any static expense you need to run your business. For example, yourfixed costsmight be your monthly lease payment, general liability insurance, Wi-Fi or internet, payroll for your employees (and yourself), government fees or licenses, and a monthly phone plan.

Variable costs:Variable costsfluctuate according to how well your business is doing. Whilefixed costsremain the same for the most part,variable costscan increase or decrease according tosales volumeand production. Examples ofvariable costsincluderaw materials,labor costs,material costs, shipping costs,credit cardor banking fees, and expenses for outside contractors or consultants.

To help gauge yourvariable costs,Freshbooksrecommends the following formula:

Variable Costs= Total Quantity of Output xVariable CostPer Unit of Output

For instance, let’s say you have a toy store and receive an order for 100 mini figurines for $300. To find the variable cost per unit, take the cost per unit in materials (50 cents) and direct labor costs (60 cents).

100 x (.50 + .60) = $110

In this case, your total variable costs would be $110, meaning the gross profit would be $190 ($300 – $110).

The physical location of a storefront also impacts how to price a product. For example, if you are paying top dollar for a monthly lease in a highly desirable area, your overhead may compel you to set a higher price point.

Before locking in theprice of your product,you should take into account your location by calculating your fixed (rent) andvariable costs (labor costs). Gathering pricing data on your top competitors in the neighborhood can also help you better understand the local market and inform your pricing strategy.

3. Create a customer persona

Knowing your customer is half the battle of yourpricing strategy. If your targetcustomer baseis single women between the ages of 35-50 making over $100K annually, that could put you in the luxury category. As a result, you can afford to price products higher than say, the local Walgreens or Target.

The best way to know your customers is to design a persona. A customer persona represents your targetcustomer base. It helps you identify their needs and problems, so you can effectively solve them. While you can base a customer persona on a real customer, it is essentially a fictional representation of who you aim to attract with your product.

Customer personas are helpful to:

• Remind you of who you serve and why
• Keep you focused on the goals of the customer rather than business goals alone
• Understand customer budgets

Think of a persona as yourcustomer basevision board where you add inspirational quotes they live by, clippings from magazines about what they wear, brands they like, and challenges they face each day.

Ask yourself:

• Who is my customer? Consider age, location, income, and job title.
• What’s their lifestyle? Are they having frozen dinners every other night with their roommates or dining out regularly at the latest hot spots?
• What’s their biggest desire? Is it getting a haircut in a stylish, spa-like setting with other services such as manicures and facials? Or do they want an affordable, family-friendly hair salon where they can quickly get in and out?
• How does your product address the needs of your target customer? Do you offer on-call plumbing services outside of standard business hours?

When you understand who your customer is and how you can provide value to them, it will help you determine the right price for your product or service.

4. Monitor sales

Watching your volume in sales will help you evaluate whetheryou’veset prices过高、过低,或者刚刚好。你可以试着different pricesusingsale pricesand other research-basedpricing strategies.

If your product is flying off the shelf and you’re struggling to meet customer demand, it might be time to consider ahigher price. On the other hand, if your stock isn’t moving, it’s likely time to test out asale priceor lower thecost of your product. The important note here is to stay agile and be willing to experiment to secure the bestmarket price.

Top pricing strategies for your product

These five common pricing strategies can help you effectively price your product. To figure out which strategy suits your target buyers, use the data gathered from the pricing tips above.

Multiple pricing

Grocery stores are famous for multiple pricing. For example: Buy two packs of yogurt and save a dollar, or buy three packs of yogurt and save $1.30. This pricing strategy works on most customers because it creates a higher perceived value. Costco has created an entire empire that promotes this idea of buying in bulk to save.

Giving customers an easy way to save builds loyalty and exposes them to more products and options that they may not have tried.

Retail pricing

This pricing strategy refers to a markup that ensures a healthy profit.

The formula is:

Retail Price= [(Cost of item) ÷ (100 – markup percentage)] x 100

Let’s apply this equation to a pack of gum:

Retail price = [(1.25) ÷ (100 – 50)] x 100

The pack of gum costs $1.25. It is marked up by 50%, resulting in a retail price of $2.50.

A standard markup in retail is around 50%, but this formula can help you adapt based on your variable and fixed costs.

Competitive pricing

Competitive pricing is when you knowingly price your product below what yourcompetitors charge. This type of pricing only works if you have a firm handle on yourfixed costsandvariable costs. Otherwise, it can negatively and quickly affect yourprofit margins.

Premium pricing

This is when products are priced higher than whatcompetitors chargeto suggest prestige, exclusivity, and quality. This can work well if yourcustomer baseis in the luxury segment, but it can also price outpotential customerswho are more price sensitive.

Anchor pricing

This pricing strategy is when a company lists the original price next to thesale priceto demonstrate potential savings. It’s a common sales tactic ofonline storeslikeAmazonthat plays on customer’s psychological desire to get a deal.

You can use anchor pricing to sell products by placing them next to similar, more expensive items. This strategy stems from the idea that everyone loves a deal, and anchor pricing makes shoppers feel like they’re always getting one.

The right price for your product

As asmall business owner, knowing how to price a product depends on several factors, including market research, where you’re selling your product or service, and who your target customer is.

One thing you can do to stay on top of market trends is to read and respond tocustomer reviews. You’ll learn quickly if they see thevalue of your productor service.

Yelp for Businessmakes it easy to see what your most passionate customers (and critics) say about you. That type of information you’d typically pay big bucks for in a focus group is available for free. It helps to know your customers well so that you can price your product competitively and keep them coming back.