Knowing how to price a product for retail can be tricky. This is especially true for those businesses that operate in highly competitive markets.
After all, you want to remain competitive, but you don’t want to make a loss.
Luckily, there are some well-established pricing models you can use to price a product. In this guide, we walk you through everything you need to take a smart approach to pricing.
Pricing is simple. It is the act of deciding how much to charge your customers for a given product in your store.
Although the concept of pricing is very easy to understand, pricing your products correctly can be a little more tricky. If you set your price too high, you will put off customers and be vulnerable to competitors undercutting you. However, if you set them too low, you will struggle to make a profit.
Good pricing is all about picking a strategy where you remain both competitive in the market and profitable.
Before you can decide on which pricing strategy is best for you, you need to consider all the elements that come into play when deciding on how much you should charge for your product. When you fail to do this, there is a potential to either drastically overcharge, or worse yet, under charge (at a loss) for the items you sell.
Below we cover the most common costs that should be considered when deciding how to price a product for retail.
Material (Or Product) Cost
Your material costs are any costs associated with the physical items that you sell.
For resellers, this is fairly simple to calculate as it will simply be the cost per unit. However, businesses that manufacture their own products will have to factor in the various materials they have to buy.
For example, materials costs for an online cookie bakery may include:
- Chocolate chips
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How you source your products can have a knock-on effect on your prices. Our guide on How to Source Products to Sell Online will help you choose the right option for you.
Marketing & Sales Costs
Your marketing and sales costs are anything you spend directly or indirectly on selling and marketing your retail products. For example, this could include:
- Facebook ad spend
- Marketing agency costs
- Printed leaflets
- Graphic designer for Instagram posts
- How much do websites cost
Labor costs will be what you pay yourself and your staff to run your business. For example, this could include:
- Warehouse staff pay
- In-house marketing team pay
- Your personal salary
Typically, labor costs cover those that are consistently employed within your business. Labor costs associated with other areas will usually be associated with different cost areas – one example of this would be the costs of outsourcing graphic design, as this would be seen as a sales and marketing cost.
However, as long as all labor (internal and external) are accounted for, that is all that really matters.
Typically, the term “overhead” is used to refer to any business costs that aren’t directly associated with the manufacture or purchase of products. This can include some of the other costs we have outlined in this section, such as marketing costs. But can also include:
- Office rent
- Business vehicle costs
- Office equipment
Taxes should also be considered when pricing your products. Although you will be able to add sales tax to the item when it is sold, depending on your location you may also need to take into account other types of tax.
Once you have all the information on how much it costs to get a product in the customer’s hands, it is time to decide what approach you will take when deciding on a final price. There are several ways to do this, and we explore them in some detail below:
Cost-plus is a simple, yet highly effective way to price a product. You simply need to select a percentage profit that you would like to make and add it to the price after cost:
Cost of product + percentage profit required = cost
For example, let’s assume your product costs $10 to make and you want to make 25% profit on each product you sell:
$10 (cost) + $2.50 (25% profit) = $12.50 (product price)
This is a great approach. Especially if your costs are fairly easy to calculate and don’t fluctuate.
Value-based pricing takes a different approach to pricing a product. Rather than asking:
“How much profit would we like to make?” as you would for cost-plus, you instead ask:
“How valuable is this product to consumers?”…or more accurately… “ What are consumers willing to pay?”
This is a more common approach for businesses where they have low competition or where the product is non-optional for the purchaser. For example, this model is often adopted in the pharmaceutical industry where production costs are often low, but products are protected by law and people have little option but to buy the product.
One major downside of value-based pricing is that when more competitors enter the market, this can have a serious impact on both your profitability and the reputation of your business. This is especially true if those competitors use another method of pricing such as cost-plus – drastically undercutting you.
Competitive pricing is much as it sounds, pricing your products to beat the competition. Typically this means offering the same or similar products to your competitors at a lower cost.
Whether this cost is slightly lower or drastically lower will depend on the price sensitivity of your target audience as well as any other perceived benefits of choosing one of your competitors over you.
Recommended Retail Price (RRP)
RRP is a common approach for many retail stores. Especially those that resell products. This approach relies on a recommendation from the manufacturer for how much you should sell the product for, which is typically based on their own cost-plus equation.
Discount pricing is an approach to pricing products that relies on the heavy reduction of a price in order to achieve a specific goal. For example, a store may decide to discount a price so low that its competitors cannot possibly compete, letting them grow its market share – ultimately giving them the power to increase prices at a later date.
This can be a risky approach to pricing. This is especially true if you get into a “price war” with competitors, since it can sometimes lead to a loss of profits.
Pricing your products correctly is the key to success. Too high and you will be beaten by competitors, too low and you will struggle to make a profit. Which pricing strategy is best for you will depend on your unique circumstances. Use this guide on how to price a product for retail to find the best approach for you.