Stop reading this blog and come back when you have found a brand new iMac for sale under $1,000.
WAIT! Don’t leave, you will never come back.
Sometimes the sum of your profit and the products breakeven price can be a difficult business matter to settle, but when you master the ins-and-outs of your businesses product pricing, you will immediately reap the benefits. This is how Apple can charge what they do for their products and why people are willing to pay that price.
Let’s take a look at 3 main keys to finding the right price for your product.
#1 Squeezing the rag dry (Target Customer Analysis)
What is a group of customers that a business has decided to aim its marketing efforts and ultimately its merchandise toward willing to pay for your product? Whether you have recently started a small business or you’re a seasoned small business owner, you have gone through a ridiculous amount of market research that gathers and analyzes information about the moving of good or services from producer to consumer, industry analysis, budgeting and crunching, etc.
Included in that research, you should have pulled an ‘inspector gadget’ on your target customer. If you have not reached a point in your small business where you have identified your target customer, that is a must before worrying about product pricing. Typically, companies follow a concept called ‘cost-plus’ pricing. This is when you mark up your manufacturing costs to sell the product at its’ [tooltip
This is when you mark up your manufacturing costs to sell the product at its’ rate of profit. In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole. It is similar to the concept of the rate of return on investment. However, this is the text book way of product pricing, and if you are going to make a fortune in business, you don’t follow the text book. One of my favorite quotes is:
Formal education will make you a living; self-education will make you a fortune.” ― Jim Rohn
You have to learn what works for your business.
If you customer is willing to pay $20 for a product that takes $2 to make, that is fantastic.
If that customer, however, is willing to pay $100 for the same product that costs $2 to make, that’s even better. This is what we call a prosperous product.
In order to figure out the number that your customer is willing to pay, you are going to have to do tons of ‘creeping.’ I mean…testing and research.
This can be done multiple ways:
One mistake young entrepreneurs tend to make, is NOT doing enough research. You can never do enough research for your company.
#2 Throwing Elbows (Competitive Pricing)
This key concept is going to need the most transparency on your part as an entrepreneur. You have to look into your competitors prices and truthfully evaluate whether your product is better or worse (even if you tell your customers that you are #1.) This is where you have to look at the man in the mirror and say one of two things:
- My product is better, so I am going to slightly mark up my prices.
- My product isn’t as good, so I am going to keep them the same or slightly lower them.
This is also the hardest step because only you know the honest truth. The more serious you are about increasing your revenue and profit margins. The amount by which revenue from sales exceeds costs in a business. [/tooltip], the more serious you need to be about competitive pricing. You must keep a tight eye on your industry as prices of competitors evolve–especially if it is a product that customers are familiar with.
For example: Let’s look at gas and cars. Gas has a price that everyone is familiar with. People are constantly watching the prices of gas and no matter what gas station they go to, the prices are fairly close. On the other hand, you have cars. The average person is not going to be as aware of the prices of this type of product, so these products have a little more flexibility in pricing per brand.
#3 Up and Down, In and Out (Adjusting Prices)
Besides competing with the industry prices, there are several other aspects of product pricing that need to be evaluated. Most industries are constantly dynamic, therefore, you need to constantly evaluate what the perfect price for your product.
Again, this is going to take a lot of focus and research. This may also take longer if you have multiple products and services. The great thing is that once it is done, it is done…until you change it again! (That’s Business) is, and occasionally adjust the price. Before you adjust a price, however, you may want to consider having different price points.
A point on a scale of possible prices at which something might be marketed for certain products/services. One thing that you will find out quickly, if you haven’t already, is that people love options. If you provide a customer with 3 or more price levels on any product (i.e. Silver, Gold, Platinum,) you will see optimum results. Since Apple seems to do most things right, let’s use them as an example again. Imagine how many sales they would lose if every one of there products only came with one option. They probably wouldn’t be close to the financial empire that they are today because less options means less streams of revenue. This same concept applies to product pricing. If a customer can choose how they spend their money, they are most likely going to feel more entitled to spend it.
Another great way to master product pricing, that is often overlooked, is simply changing the price. Let’s say your retail store sells Levi’s jeans for $50, but you sell your store brand jeans for $46. You have communicated to the customer that your jeans are good, but not quite good enough to be the price of Levi’s. Most people would look at this and simply buy the Levi’s because if they are going to pay that much for jeans, why not have a name brand for 4 dollars more? It would be better to mark your jeans at $52-55 and have them ‘on sale,’ slightly lower than the Levi’s. Your other option would be to make knock offs and undercut the industry, which we all know what happens to those types of
You have communicated to the customer that your jeans are good, but not quite good enough to be the price of Levi’s. Most people would look at this and simply buy the Levi’s because if they are going to pay that much for jeans, why not have a name brand for 4 dollars more? It would be better to mark your jeans at $52-55 and have them ‘on sale,’ slightly lower than the Levi’s. Your other option would be to make knock offs and undercut the industry, which we all know what happens to those types of businesses..
Wrap it Up
Mastering your product pricing is going to single-handedly be one of the most determining factors of your profit margins and cash flow. And if you are any type of businessman or entrepreneur, you probably understand that cash flow is the #1 killer of small businesses.
- Identify what your customers are willing to pay
- Utilize competitive pricing
- Adjust your prices