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How Do You Price Your Product To Ensure Profitability?

Pricing is one of the important decisions you have to make about your business. For you to be able to run your business profitably, you should know how to price your product or service appropriately.

The pricing decision is so vital that it will determine whether you will report profit or loss at the end of the day. It is not enough to have your products sold to customers; they must be sold at the price that will guarantee profitability. If you sell too cheaply or on unfavourable terms you are going to fail no matter how you try. At the same time the price must not be too high so that you will not drive customers away. So, how do you price your product then?

Factors Affecting Pricing

So, how do you price your product then?  Basically there are three factors that determine how much price you should place on your product or service. These are; costs, competition and customers.

Costs

How do you price your product by taking costs into consideration?

In the process of manufacturing or buying your products, you will definitely incur costs before the products become available for sale to the customers. The price you charge your customers should be able to cover your costs. It is when your price exceeds your costs that it can be said you make profits but if your cost is higher than the price you place on your product, then loss becomes inevitable. You may be wondering why people charge price that is below their costs. Nobody wants to run business at a loss but the problem is that some people cannot actually determine the costs of their product. When a business owner could not determine his costs, pricing becomes guesswork and this will either be favourable or unfavourable.

Therefore, there is need to have adequate knowledge of the cost structure of your business. The costs which you need to consider can be broadly classified into fixed costs and variable costs.

Fixed costs

As the names implies, these are the costs that remain fixed regardless of your level of activity. This type of costs remains the same whether you produce more or nothing at all. Examples of these costs are rent, staff salaries, advertisement cost, administrative costs and other overheads. Even if you are not presently drawing a salary from your business, you must include in your pricing calculations the amount of your own services. Fixed costs can be described as a two edged sword; it can work for or against you. It will work for you if you are able to sell more of your products as the unit costs for your products become less. Having lower unit cost will translate to higher profitability. It can also give you a comparative advantage over your competitors as you can afford to lower your price or give discount in order to attract and retain customers. But if you can’t sell enough products to offset your fixed costs, your unit cost will be high and this can result to lower margin. Any attempt to increase your price to the level that can guarantee your expected margin may result to pricing your product above your competitors. This can make you to lose customers to those that sell at cheaper prices.

Variable Costs

These are the costs that respond proportionately to your level of activity. This costs increase when you increase your level of activity and reduce when you reduce the level of your activity. Examples of these costs are; cost of raw materials or cost of product bought for resale. The unit costs are usually fixed per unit. The only reason while these costs can have slight difference in unit cost is when you enjoy discount such as cash and quantity discounts.

When it comes to pricing, a lot of business owners especially those that deal in buying and selling of products usually overlook the fixed costs. They don’t factor in fixed costs as part of the costs of their products thereby making them not to be able to absorb the costs.

For example, a person who buys laptops at unit price N70,000 and sells at N75,000 might ignorantly think that he makes N5,000  as net profits. But if the fixed costs such as salaries, rent and advertisement costs are allocated, you will discover that selling at N75,000 does not guarantee profits especially when enough number of the laptops were not sold. More illustration will be given in the section ‘how to calculate your breakeven point’.

Read Also: How to Calculate Break Even Point in Business Plan

Competitors

How do you price your product when you have competitors?

It is not unlikely that you will not be the only person selling your product line in the market. There will be other people selling the same thing you are selling. In this case, you may not have much influence on pricing decision as you may not be able to fix the price of your products above what other people are selling in the market. The only way you can achieve this is through product differentiation.

Product differentiation can simply involve adding more features to your products, special design and packaging. If you can convince your customers why your products are superior to that of your competitors, they may be ready to pay premium price.

Also, you can choose to reduce your price by selling at a lower price in order to penetrate market and gain acceptance. This has to be done with caution as it might be difficult to increase your price in the future especially when nothing has changed about the product. Also, people have a way of attributing price to quality. If you sell at a cheaper price, it may create impression in the mind of your customers that your product is of less quality.

To find out your competitors’ prices, you simply need to go to the market and do some price survey. Get the lowest and the highest prices and then see how your price compares with them considering the features of your own product. If you offer services, you can call your competitors and pretend as if you are a customer. You will ask all the necessary information that you know will help you in fixing your price.

You should not forget that your competitors need not to be those that sell the same products with you. Your competitors include those that sell products which are close substitute to your product. Having this understanding will help you in your pricing decision.

Customers

How do you price if your product is new?

Customers are kings. Ultimately customers determine the success of your products. If your product is a new innovation in the market, you need to find out how much customers are willing to pay. You cannot sell your products above what customers are prepared to pay. If you sell your product above what they are willing to pay, your product will not sell. Sam Walton put it the right way by saying; There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else. You can carry our market research to know the mind and perception of your prospective customers about your products. How customers see your products may be different from how you see your products. Customers’ perception may determine whether your products can be priced at a premium.

How do you price your products if you don’t know customers’ perception? Embarking on market research helps your pricing decision to actually consider what the reactions of customers will be therefore ensuring that a fair price is set for your products. You are not selling too high nor selling below what customers are willing to pay. However, the type of your products will determine whether there will be a need for market research.

How do you price your product if similar products exist?

If you offer the same products with what are already obtaining in the market, spending on market research with the aim of determining price will amount to a waste of time and resources. Benchmarking your price with competitors will be more appropriate. But more importantly, rendering superb customer service can make the difference.

Read Also: How to Adjust Price to Maximize Profit

Business Planning, Starting a Business