How to Price Your Product For Success

Pricing is pretty simple when you boil it down. You want to sell your product for more than the cost of the materials and time. You have to figure out how much your time is worth, but beyond that, basically you want to sell something for more than you made it for.

When it gets more complicated is when you want to grow and start selling in stores. Hopefully, by that time you have grown to a size where you’re able to order your materials in larger quantities, thus bringing down their price and allowing for a profit even when you’re discounting your products and selling them in large quantities.

Pricing for Sales

Some companies price their products in a way that they can have a sale and make someone stop and want to buy. You see it all the time at Michaels, Hobby Lobby, Macy’s and more. The 40% off sale that you see is very much planned into their pricing.

Sometimes at a market, I would put a price on a product and if it didn’t move well, I would put a 20% off or 30% off sale on my goods so I could see what price they started selling. I would make sure I never priced them below what it cost to make them unless it was the last of a collection or the product never sold well in the first place. Because getting something rather than nothing is always better, right?

Some products sell well at $10 and you can price them there. However, if you had priced them at $20 with a 50% off sale (at markets only, or some other type of buy now incentive) they might sell better.

Psychologically people love sales. But beware, this can also lead you to be categorized as a certain kind of business, making your brand feel less valuable because people are waiting for “the next big sale.”

The bottom line with pricing advice is to try lots of different things and see what moves your products.

Comparing Prices

One way to figure out your pricing is to compare your company to another successful company like yours. You may be pleasantly surprised to find that a product costs you $2 to make and competitors sell it for $20.

This isn’t necessarily the time to undercut their pricing and try to drive them out of business. This is the time to identify how they’ve priced their products to successfully grow larger as a company, be able to expand and hire more staff, pay their mortgage, etc. These are all things that you may one day want to do.

People that underprice their competitors do not always last. Profit is very important and it’s better to compete by creating a better product, brand or experience so you can charge more than a competitor, not less.

How to Calculate Your Cost

If you’re doing this as a hobby maybe you don’t want to make a profit but it’s important to do a little math. It’s important to know what Fixed Costs and Variable Costs are as your company grows.

Let’s take the example of a candle company:

Fixed Costs are those costs that don’t change, like your rent for your storefront or your subscription to your email account.

Variable Costs are those costs that change. If you bought your materials for your product in a larger quantity, then that would be a variable cost. If you produced 1000 more candles, the number of hours for labor would go up. You may need new equipment, or you may need to hire an employee. All of these things are variable costs that companies don’t always think about in the beginning, but it is something to reevaluate annually, especially during growth.

Calculating the Cost of Your Product

  1. Come up with all, and I mean all, of the expenses you may have. If you don’t price it right, that $5 profit per product can quickly go to gas, car, transport, rent, supplies, etc.
  2. Then figure out how much time it takes you to make the product and pay yourself or another person an hourly wage. Add this in.
  3. You will also want to factor your rent or market fees into your pricing. When factoring in a market, you shouldn’t just think about how to cover the cost of the booth, but think with the connections you can make if you’re interested in getting into stores.
  4. Eventually, as you grow, you may want to add in a little for a marketing budget (kind of like #3 but online). This will be determined after you see how much it costs to sell one of your products with online ads or how much it costs to gain one new customer and then retain them. This is something that I would at least pad in 10-20% when getting started.
  5. As you get even bigger you may need to hire employees, accountants and other support staff. Reevaluate cost at least once a year.
  6. Now take all of those expenses and add them together, and that will be your cost to produce your product. Any price over this will give you profit.

Higher Priced items pros and cons

When you price your product much higher than the normal cost of your product, you may run into a few challenges. First, you may need to educate your potential customers on why your product is priced at a much higher premium. This can require extra time or signage to get the message across.

One suggestion for higher-priced items such as luxury purses is to try to have lower priced items, like keychains or purse accessories, that are more affordable so that you can build your customer list and, hopefully one day, sell them an expensive purse.

Lower Priced items pros and cons

As mentioned before, pricing your item below your competitors is not always a good idea. Additionally, your company may be thought of as “discount goods.” For that reason, it is better to price at and maybe at some point a little above your competitors, especially if you are providing a better quality product.

For example, Gluten Free or Paleo baked goods are higher quality and more expensive products than a normal baked good, so be sure to promote that you have a higher quality product when showcasing your product.

Pricing Every Product

You’ll see us mention this in other articles, but once you have determined a price, be sure to label all of your products or have a clear pricing poster out so that people can know costs without having to ask. The only exception to this would be on higher priced goods. When someone asks you for pricing, it creates an opportunity to educate the potential customer, but most people are too shy to ask in the first place. It’s normally better to have clear signage that also shows why the product is more valuable.

Here’s a great profit margin calculator from Shopify!

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