As an entrepreneur or a start-up you will have the amazing privilege to experience what it’s like to bring a product or service to market and to introduce something that you made to the world. Here’s some pricing advice for your first product or service.
You’ve got an idea for how to make your millions and to provide something that will genuinely make people’s lives better and you’ve done the hard work in finding a manufacturer, designing packaging, researching the legal side of things and researching your market. Now all that’s left is to start selling it – either through your own channels or through a distributor or a store.
But before you can do that, you are going to first need to do one more tiny thing: which is to think about pricing. This is something that many of us don’t really consider until the last moment when launching a new product or service, but actually it can make all the difference between success and failure. Here we will look at how you should go about choosing a price for your new item so that you make a profit without driving away any chance of anyone wanting to buy it.
When choosing a price for your offering you might be tempted to try plucking a price out of the air and hoping that people are willing to pay it. This however would be a huge mistake not only because you might find that no one actually wants to pay that price, but also because it doesn’t take into account your various expenses. When you produce a product or provide a service there are lots of costs you need to cover and lots of people who need to receive payment: all of these need to be considered.
For instance, if you are selling a product then you will need to consider the cost of manufacturing, of packaging, of distribution, of storage, of any instruction manual and even of marketing. This also means working with a lot of other people, and that in turn will mean that each of those people/companies will need to make a profit too. Your product needs to be profitable enough that everyone involved manages to do well out of it. So work out your per-unit cost including your everything from labour to colored inks, and then think about how much you want to earn by charging a certain amount on top of that. Of course charging more will increase your margin but decrease the volume of sales. You also need to think about your competition and the market – are others undercutting you? Or have they demonstrated that people will pay more?
The Two Prices
Now you know the cost of producing instances of your product you should next look into how much you need to charge in order to make a good profit and in order that everyone else does too. For this you should actually come up with two different prices, which will include a wholesale price and a suggested retail price. The wholesale price is of course how much you will charge the shops, while the retail price is how much you think they should charge their customers.
To decide this you can either use the ‘1-5 rule’ or a method called ‘keystoning’. In keystoning you simply double the wholesale price to get the retail rice which works best when selling directly to stores. Otherwise, the 1-5 rule can be used to work out the retail price based on per-unit production costs alone – by simply multiplying them by five.
These techniques are useful, but you also need to allow for some flexibility and common sense. How much would you pay for your product or service?