So, you’re all set up and ready to start selling, but you’re not sure how to price your products. You’re not alone – it’s a stumbling block for many first-time sellers and small businesses. Not to worry, though, because we’re here to walk you through it.
Pricing your products correctly is important. Ask too much, and your customers will go straight to your competitors. Ask too little, and nobody will take you seriously. Then there’s the issue of profits, markups, and margins – how do you calculate the selling price of a product to cover all your overheads?
Entrepreneurs often struggle with these questions, especially now that markets are more competitive than ever. Nine out of 10 consumers price check products on Amazon, so it’s easy to understand why there’s so much pressure on getting your pricing right.
We’re here to help. This article will walk you through the main things you need to consider, give you a few helpful formulas to follow, plus reveal some fun pricing psychology tips to give you an insider’s headstart over the competition.
Let’s get started, shall we?
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We’re starting with this because it’s the most important tip for pricing your products. Always make sure you’re setting prices that cover your costs, otherwise you’ll be running your business at a loss, which is no fun.
This is the golden rule to keep in mind as you go forward and start pricing up your products.
You’re probably thinking we’re stating the obvious, but it’s easy to get drawn into competitor price wars. There’s no point in selling your products cheaper than anyone else on the market, if you can’t afford to keep your business running.
We’ll show you how to calculate your costs soon, but first it’s time for some competitor research.
An important part of setting your prices is understanding your customers’ expectations. The last thing you want is cries of “How much?!” echoing from your product pages. The best way to get a feel for the market is to put your detective hat on and get snooping.
Take a look at your competitors’ prices and make a note of the price range you find. What are the most expensive prices, and the cheapest offers around? It’s unlikely you’ll want to set your prices any higher than the uppermost price tag, unless your product is unique enough to be obviously worth the money.
You can also enlist friends, family, and colleagues to take surveys for you. How much would they be willing to pay for your own products, or similar ones? Which competitor would they be most likely to choose, based on price? This should give you a realistic idea of what people would expect to pay.
Although this is our first step, it’s not a one-time thing. You should keep an eye on the market, and your competition, pretty much constantly. If a competitor runs a massive sale, you need to know about it. If a new brand pops up, you should take a look at their prices and decide if you need to change your own strategy.
Think of yourself as a superspy – constant vigilance is key!
Now we get to the fun part.
The simplest way to determine the price of a product is cost-plus pricing, also called markup pricing. This means working out how much it costs in total to make your product, then adding your markup percentage.
The markup percentage is basically how much profit you want to make on the product – between 20% and 50% is the industry standard.
The formula looks like this:
Total Cost of Product + Markup % = Final Product Price
You might have some questions right about now, but don’t worry – we’re going to break down this equation.
Your product’s total cost is made up of a few different factors. If you buy products to resell, factor in how much you pay for each item. Otherwise, you need to add up the following:
- Cost of materials – how much the materials cost to make your products
- Cost of labor – do you pay other people to make your products? Do you build them yourself? Make sure to factor in labor cost!
- Overheads – these are made up of two things: the first is fixed expenses, which don’t change, such as rent, salaries, insurance, legal costs, etc. The second is variable expenses, which vary month to month, such as telephone bills, packaging, marketing, etc.
Markup is the difference between the cost of the product and the selling price of the product. In short, markup is what creates profit.
Markup is usually expressed as a percentage. 50% tends to be the standard amount, but it does vary from business to business, depending on which industry you’re in.
Let’s use an example. If you find that the total cost of your product is $15, and you want to add a markup of 50%, you need to do the following sum: $15 x 0.5 = $7.50. That means you’re adding a markup of $7.50 to the cost of your product.
So, to take the equation we showed you above, your total selling cost will look like this:
Total Cost of Product + Markup % = Final Product Price
$15 + $7.50 = $22.50
Cost-plus pricing has a lot of benefits – it’s simple, makes it easy to clearly justify the end total, and is pretty consistent. However, it doesn’t take competition or market trends into account, meaning you can end up with prices that are a bit too high.
That’s where your research comes in. You might have to tailor your prices to take competing brands into consideration, and keep your prices attractive to customers.
- If you have your own online store, remember to factor your website cost into your outgoings. Our definitive pricing guide How Much Should a Website Cost You? gives you a clear idea of how much you can expect to pay.
If you’re selling to other distributors, you can use cost-plus pricing to work out your wholesale price. This is the selling price you would use if you’re selling to boutiques, galleries, or shops – anyone who will then be selling your products on to their customers.
However, if you’re selling directly to customers yourself, like most small businesses and small-scale sellers, then you need to work out your retail price.
Your retail price is how much customers will pay for your product in stores and online – it’s the final price, and will be higher than the wholesale price.
If you don’t fancy cost-plus pricing, here’s another simple way to work out your wholesale price and your retail price:
(Cost of Labor + Cost of Materials) x 2 = Wholesale Price
Then simply double your wholesale price to calculate your retail price:
Wholesale Price x 2 = Retail Price
This is a very simplistic way of working out your wholesale and retail price. There’s a mind-boggling range of other equations out there for you to choose from, some a lot more complicated than others. As always, it’s worth trying out a few methods and finding the one that works for your business – and don’t forget to keep factoring in market prices and competition into your results.
Finding the right price for your products is important. You need to cover your costs, make a profit, and keep up with your competitors. But there’s one last important factor: your customers!
The first rule is not to confuse, distract, or overwhelm your customers. Always keep pricing clear, uncluttered, and easy to process. Confused shoppers aren’t going to spend lots of money.
Luckily, there are a few tricks of the trade, and some nifty psychological moves you can make use of. Take a look through the tips below – you might find it opens your eyes to your own habits next time you go shopping!
Have you ever wondered why most prices are set at .99 cents instead of just rounding it up? Well, there’s a reason – people usually pay more attention to the left-hand number rather than the numbers after the decimal. So $9.99 looks infinitely better than $10!
This is called charm pricing, and is a tried and tested method used by most sellers. Don’t miss out – go through and change any round prices so they cost one cent less.
The 100 Rule
If you have a mix of products priced above and below $100, then this handy tip could come in useful.
“The Rule of 100” suggests that if you’re running a sale on items costing under $100, you should show it as a percentage discount. Whereas, if you’re running a sale on items costing over $100, you should show the savings in dollars.
Here’s an example:
- ‘25% off’ for an item that costs $80.
- ‘$98.75 off’ for an item that costs $395.
You’re not actually taking any extra money off the product – the customer is saving the exact same amount of money whether it’s shown as a number or a percentage. But the customer feels like they’re saving more, making them more likely to buy. Sneaky, right?
It can be tempting to increase your product price to include shipping costs – that way, you can offer “free” shipping to draw customers in.
This can be a successful tactic, but if you find it’s not working, it might be with considering “unbundling” your costs. Instead of combining shipping, separate the cost so the product price seems lower.
For example: $12 + $2.99 shipping, rather than $14.99 + free shipping.
This can be an especially useful tactic if you’re selling in online bids on platforms like eBay.
Show Off Your Most Expensive Items
But, won’t that scare away my customers?
Not necessarily! In fact, it has been suggested as one of the most effective psychological tactics you can use. There are a few ways you can put this into practice.
One option is to put two similar products next to each other, with very different prices.
You might be surprised to find that people are drawn to the more expensive option, because its higher price promises a higher level of quality.
If you don’t think your customers would go for this tactic, there’s another way you can make your expensive products work for you. Simply put them high up on your website, or display your products from most expensive to cheapest.
This way, your customers have this high price tag in mind, and are comparing all subsequent prices they see to this benchmark. The result? The rest of your products will seem like great value!
Make Use of Deals, Discounts, and Special Offers
‘Buy One Get One Free’ is the godfather of deals, but it’s a little tired now. Get inventive with your deals – offer half price items, savings for your customer next time they buy, or even the chance to unlock exclusive products or sales.
Jump on big sales events like Black Friday and Cyber Monday, and offer targeted sales around times like Mother’s Day, Father’s Day, Christmas… you get the idea. You can even get inventive with this idea – if you sell pet accessories, why not run a sale for National Golden Retriever Day? (It’s every February 3rd, by the way, just so you know.)
If you can’t afford to run store-wide sales, why not offer discounts to targeted groups at particular times? For example, Tuesdays could be student discount day, Thursdays could be pensioner discounts, and weekends could offer family deals.
Find a niche that works for your business, and give your customers something enticing.
Always Be Clear On Savings
This is just good practice, but if you’re running a sale, you should always show the original price next to the new sale price. If you’ve discounted the product more than once, show each old price crossed out, with the current price clearly displayed.
This makes sure your pricing is transparent, and shows customers how much of a good deal they’re getting.
It can also be effective to make the original price larger than the reduced price. Visually, this leads the customer to believe they’re saving more, and makes them more likely to click the Buy button.
Once you’ve calculated your costs and tried out some of the psychological tactics we’ve outlined above, don’t stop. You can change your prices – they’re not set in stone. Keep testing them, and don’t forget to gather customer feedback!
As well as general tweaks and tests, here are some examples of times when you might want to consider changing your prices:
When Introducing New Products
When you introduce new products, don’t be afraid to make them a little more pricey than your older items. You can even lower the prices of your existing products if you can afford to – this could make them more appealing to customers, while adding more value to your shiny new additions!
Following an Increase in Product Cost
If for any reason your production costs increase, make sure you do the math to ensure your selling price is still covering your outgoings.
You may have already allowed some wiggle room, but if your markup or profit margins are a bit tight, it’s extra important to stay on top of the money going in and out. Remember, the key thing is for your business to make a profit!
If your products are already pretty expensive, take a look at how you could trim and save on your costs.
Due to External Influences on the Market
If prices are rising or falling, or new competitors are creeping in, you’d be wise to adjust your prices to make sure they stay relevant and competitive.
It can be hard to strike a balance between prices that are attractive, while still suggesting value to customers, but it’ll be impossible if you don’t keep your eye on the market.
Pricing products can be daunting, especially when you’re just starting out. But it doesn’t have to be. Start off with competitor research, do your calculations, then make your prices attractive to customers, and there’s no reason the sales shouldn’t come flooding in.
Here’s a recap of our six steps:
- Cover Your Back
- Understand the Market
- Calculate Your Costs
- Wholesale vs Retail
- Hook Your Customers
- Don’t Stop; Keep Testing!
As your business grows and your confidence in pricing products grows too, you’ll likely start finding your own tips, tricks, and insider know-how to add to this list. But for now, our guide is here to help get you started.
Before you go, here are some final words of wisdom that are worth taking away from this article:
- You must always make sure your prices are covering your own costs. Bottom line, that’s what pricing your products is all about.
- Your pricing will be influenced by the market of your chosen industry, and the other businesses you’re sharing that space with. Keep your prices current and competitive!
- Pricing is different for everybody. We know it sounds like a cop-out, but it’s true. What works for you won’t work for someone else, so make sure your pricing strategy is right for your business.
There you have it – we’ve taken you through the key points of setting the right pricing for your products. It’s not random guess-work, and it’s not magic – and we hope that with our guide, it’s not as hard as you first thought.
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