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Business

How to Price a Product: 5 Steps for Pricing Goods and Services

Written by MasterClass

Last updated: Mar 22, 2020 • 3 min read

Correctly pricing goods and services is a tricky challenge facing small business owners. To win market share and retain customers, you need more than just a high-quality product. You must also have a pricing strategy that keeps your product competitive with similar products while covering the fixed costs and variable costs associated with running a business.

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What to Consider Before Pricing Your Product

A pricing strategy hinges on a number of factors. These include whether you plan to sell in stores or on an e-commerce platform, whether you're selling services or physical goods, where you envision your brand in the marketplace (are your potential customers bargain-seekers, luxury buyers, or somewhere in between?), and the actual product cost you must pay to get your goods to the marketplace.

Once you determine the proper parameters for your small business, you'll be able to devise a selling price that keeps you competitive in the market, yields a satisfactory profit margin, and adequately services your business's bottom line.

How to Price Your Product in 5 Steps

Setting prices that allow your business to sustain itself is essential to continued success and growth as a company. Thankfully, it's quite feasible to create a practical pricing model. Here's how to do it:

  1. Study the market. If you're bringing a new product into an existing market, you need to research price points for similar products. Customers will have an inherent sense of fair product pricing within your sector, and you need to meet their expectations. If you plan to vary drastically from your competitors' prices, there should be a clear reason for doing so. In the world of easy online searches, always assume that the general public is aware of how much your competitors charge.
  2. Assess your costs. On an ongoing basis, a business must cover both fixed costs and variable costs that go into making their product. Fixed costs include things like real estate leases, insurance payments, and annual taxes that some businesses owe to states regardless of income. Variable costs depend on the amount of products you manufacture; they include raw materials and labor costs (employee wages plus benefits). There may also be costs from the product development process that you need to pay down. These all combine to form your total cost.
  3. Decide how your product will be sold. If you plan to sell your product yourself via an online store or your own shop, you'll be going direct to the consumer. If you sell your product to a retail store, the store will add cost to cover their own bottom line—a model known as cost-plus pricing. If your product is in stores, those retailers won't want you undercutting them by offering lower prices online. A simple way to address this is to either mark up the price of the product on your own website (so that it matches the in-store retail price). Alternatively, you can opt to only sell in either retail stores or direct-to-customer. Many retailers won't allow you to do both.
  4. Decide whether you're aiming for the high-end, middle, or low-end consumer. Different prices connote different messages about your product or service. A higher price may imply that your product has a higher value, but it may repel savvy bargain hunters or potential customers with limited incomes. Lower prices may (fairly or unfairly) imply lower quality, but a low product price can often lead to a high sales volume. Meanwhile, a middle-of-the-road price suggests a standard-issue, reliable product. This can work for certain types of goods (like groceries) and services (like auto repair). On the other hand, a mid-tier pricing structure lacks both the high profit margins of the luxury market and the massive volume of the bargain market.
  5. Monitor progress over time. Most small business owners need time to assess the true market value of their goods or services. To succeed in the long run, you'll need to monitor sales and see if the dollar amount you've assigned to your product comports with the dollar amount the public is willing to pay. If it's hard to keep up with demand, you may have reason to raise your prices. If sales are low, you may have to offer a sale price (or slash the normal retail price) in order to establish a customer base. The most successful businesses respond ably to market trends. Pay attention to your customers; if you can continually address their needs while maintaining the necessary cash flow, you can count on a long, prosperous lifespan for your product.
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