Large and small businesses experience problems regardless of industry or occupation. Pricing products and services are something that most companies resonate with. Understanding how to price your product can make a difference for businesses that thrive for a long time or those struggling to float.
What is the product price?
Product pricing is the process of setting the value of a product or service that the target market is willing to pay. For example, if you have a coffee shop, product pricing comes when you decide how much you want to charge for each type of coffee. Similarly, if you own a service-based business, you can choose a per-project or per hour pricing scheme.
What should I price the product?
When deciding how to price a product, you need to consider both your cost and your perception of value of your customers. This balance allows you to cover costs while appealing to the market.
Here's how to get started:
We will assess your cost: Know the inside and outside of what is needed to produce and provide services.Understand your market: Consider what your target customers will be willing to pay, and how your competitors price similar products.Choose your pricing strategy: Choose a strategy that matches your brand, market position, and profit targets.
If you're struggling to know where to start, competitor research can provide insight into how industry and location pricing is done. This is also a great way to see where the market gaps are and add value to fill them accordingly to increase the premium.
This example is called a competitive pricing matrix. You can view a brief summary of what this looks like:
How to Price a Product in 3 Steps
Product pricing involves understanding the costs associated with creating a product, the benefits you are aiming to achieve, and considering the ongoing costs of continuing to run your business. Here's how to break it down:
1. Add variable costs (per product)
Variable costs will change based on the amount of production or sales. These costs are:
material: The raw materials or parts needed to make your product. For example, if you are making homemade candles, this includes wax, wick and fragrance oils.Direct labor: Wages paid to employees directly involved in production. If you run a custom t-shirt business, this includes the time you spend designing and printing each shirt.package: The cost of packaging products for a bakery is the boxes and bags used to package breads and pastries.
Calculate the total variable costs by adding these costs together to each product.
2. Consider profit margins
Your profit margin is the percentage of the selling price that is profitable. Here's how you think about it:
Determine the margin you want: Determine the profit margin you are aiming for. Typical profit margins can be anywhere from 20% to 50%, depending on the industry.Applies to pricing. For example, if the variable cost is R5 and you want a 50% profit margin, then you should sell the product at a price where R5 represents 50% of the price and means the selling price of R10.
3. Include fixed costs
Fixed costs are overheads that remain the same no matter how much production is produced. These include:
Rent: The cost of leasing business space. Whether it's 10 or 1,000, rents remain constant.Utilities: Electricity, water, and internet services are examples of utilities that you pay each month.Salary: Wages paid to employees who do not directly produce products, such as sales teams and managers, but are essential to the business.
Find out how many of these costs each unit should be incurred by the number of units selling total fixed costs. For example, if your fixed costs are R2,000 per month and you sell 1,000 units, each unit will include a fixed costs of R2.
Examples of product pricing
Take a small bakery as our example. Imagine you own this bakery and want to price a new type of artisan bread that you're just starting to baking.
Here's how to apply the above steps:
Step 1: Add variable costs (per product)
Ingredients (Wheat Flour, Water, Yeast, etc.): R1.50Direct Work (Baker's Time): R2.00
Total variable cost per loaf: R3.50
Step 2: Consider the profit margin
We determine that each bread needs a 50% profit margin. This means you want your profit to be 50% of the selling price.
Step 3: Don't forget about fixed costs
Fixed costs (rent, utilities, equipment depreciation, etc.) are R2000 per month. We estimate that we will sell 1,000 breads each month.
Fixed cost per loaf: R2000/1000 = R2.00
Calculating the selling price
To find the selling price per loaf, add the variable cost per bread to the fixed cost per bread and apply the desired profit margin.
Total Cost per Pan (Variable + Fixed): R3.50 + R2.00 = R5.50
To achieve a 50% profit margin, the selling price should be 150% of the total cost (100% to cover costs, 50% for profit).
Selling price per bread: R5.50 x 1.5 = R8.25
Therefore, increase the price of artisan bread to cover your costs and achieve your desired profit margins R8.25 per bread.
How much profit should you make from your product?
Usually, profit margins are in range 20% to 50%however, this may vary widely depending on the industry and the specific product. It is essential to balance it to ensure that your profits are as high as possible without overpricing your product.
Aim for optimal profit: The goal is to maximize profits while taking into account marginal costs (the cost of producing one additional unit) and marginal revenue (the revenue from selling one additional unit). If the cost of creating another product is lower than the revenue generated, it is usually a good idea to increase production.Beware of overprice: If you set a profit ratio too high, sales can be reduced if you exceed what your customers are willing to pay. This is where understanding the balance between marginal costs and marginal income is important. For example, if you are producing and selling one of the other widgets in r5, but only R4 is revenue, you will lose money on each widget created and sold beyond a certain point.
3 tips for increasing profit margins
Increased profit margins can often be achieved by focusing on low, drooping fruits within business operations. One effective strategy is Explore wholesale purchase optionsespecially for large quantities of items, this can significantly reduce the cost per unit. Finding low-cost suppliers without compromising quality can contribute to better margins by directly reducing costs.
Additionally, it reduces the overhead Optimize workspace efficiency Alternatively, reducing unnecessary costs can make a huge difference in revenue. Maximizing supply chain efforts through improved logistics and inventory management can lead to reduced waste and improved cash flow.
Finally, don't underestimate the power of Negotiation with vendorsEven a small reduction in costs will still connect over time and improve overall profitability.
What factors should be taken into consideration when pricing a product?
Continuing from the profit discussion, several important factors should affect how your product is priced.
Marginal cost vs marginal revenue: This is essential to understanding how much you can produce and sell without reducing your profit margins. If your marginal income is consistently above your marginal costs, you are in a good position to consider an increase in production.Fixed costs and profits: Remember that fixed costs (such as rent and salary) do not change at production or sales levels. Product pricing should cover these costs and contribute to profits. For example, if fixed costs are high, the profit margin per product is high to help the business stay profitable.
How to hurry and help
From determining the right profit margins to considering both variable and fixed costs, it is clear that financial management is the key to business success. Slow descent It provides small and medium-sized businesses a bridge to this success by providing business owners with a platform that connects a variety of financial solutions tailored to their unique needs.
Swoop simplifies the process of finding and securing funds for your business.
Whether you're looking for loan Increase production, reduce costs, and explore New market opportunitiesaccess to Swoop's smart matching technology and expert advice allows you to make informed financial decisions. Tap Swoop resources to easily navigate the complexities of business finance. Click the (Start) tab on Swoop's platform to unlock these opportunities and drive your business towards your financial goals.
