Pricing your product

The Small Business Company

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Product pricing is an essential part of any successful business. Your product's price must maximise sales and profits while covering the costs of running your business. This is in formation on methods to determine the selling price of your product.

Does "sale" mean lower prices or does it mean "get outta here"?

How much should you charge for your product? This is a really important question. Pricing too high will reduce your sales, while pricing too low will reduce your profits.

It's easy to fall into the trap of overpricing. You are emotionally attached to the product and may feel it deserves a higher price than what it is really worth. There's also the temptation to try and recoup all your expenses as quickly as possible but if the product is overpriced, demand goes down.

Underpricing carries its own set of consequences. In addition to the impact on profits, not charging enough can create the perception of poor quality. On the other hand, reducing the financial risk with a lower price could provide the necessary motivation for many new customers to try your product.

There are four basic methods to determine the selling price of the product:

Cost-plus pricing. Once you've calculated the cost of the product, you add the amount of profit you want to make to arrive at the sale price.

Demand pricing. Using this method, prices are determined by a combination of sales volume (what you actually sell, measured in units or dollars) and desired profit (how much profit you make on those sales dollars after the costs of goods and doing business have been subtracted). The process requires the ability to calculate in advance what price will generate the optimum ratio of profit to volume.

Competitive pricing. When the market has already established the price for your product, it's wise to operate within that range. Study each competitor carefully to identify the prices they are charging. You should also determine the degree of price awareness among consumers.

Markup pricing. Some manufacturers, wholesalers and retailers simply add a set amount (the markup, usually expressed as a percentage of cost) to the cost of a product to reach the final price.

You may find the most effective pricing method is a combination of two or more of the basic strategies.

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