There are many factors that influence a product’s success in the marketplace. Price is just one, but it’s an important one. The wrong price will dampen sales, even destroy them altogether. The correct price for any product–goods or services–is what the market is willing to pay for it. The market doesn’t care what the product costs you to make or to buy. The market will pay a price that reflects the product’s perceived value. If you find the market values your product for less than it takes you to make or buy it–or less than you can charge for it and still make a decent profit–it’s time to find a cheaper supplier — or a new product.
Scarcity may also determine market price. An oversupply of the product in the market forces price down, as competitors lower price in an effort to undercut other sellers, and move inventory. The danger in playing this game is that competition will push prices down so far that the market will not be profitable for anybody. Of course, price goes up when the product becomes scarce.
Some products are more sensitive to price than others. Consumer electronics are notorious in this regard. Competition forces prices down, to the point where profit margins are dangerously thin. That’s why so many consumer electronics retailers have come and gone.
So how should you price a product you sell? As we’ve noted, your costs don’t matter to buyers. But you need to know your costs because they tell you your break-even point, the point at which your cost for the product equals an acceptable price to your customers — that is, zero profit and zero loss for you. You must sell for more than your break-even to make a profit.
To determine your cost for a product, don’t forget about your indirect costs — which you must add to your direct costs. Direct costs are the costs of making or buying the product, including wages, freight, and any other charges which can be directly attributed to the product. Indirect costs are an appropriate portion — which you determine — of what you pay for administrative and accounting services, office supplies, telephone, and other charges not directly connected to the product. Each product you sell should bear a portion of your indirect costs.
Your pricing should support your marketing strategy.
If your strategy is to win customers away from your competitors fast, price lower than your competitors. Your new company may be able to win a significant piece of the market, establishing your customer base, and your presence in the market, quickly. But you must be able to live with a small profit margin.
If your strategy is to position your product as a premium product, and show the market why it’s worth more than competitive products, then price higher than your competitors. You will likely win fewer customers, but will generate bigger profit margins. This strategy may not be appropriate for your startup business, unless you have the money to mount the aggressive promotion campaign often necessary to support premium pricing.
If your strategy is meeting your competition, price your product about the same as your competitors price theirs. This puts you head-to-head with the competitors, and you must be prepared to show the market, point by point, why your product compares well with what they offer.
Note carefully that when customers evaluate your product, they see service as a part of that value, essentially part of the product itself. Quick delivery, your attention to their needs, adequate inventory are all factors that can affect customers’ buying decisions. They may pay you more for a product they can get elsewhere, if they believe your excellent service provides better value.
Markets change, competition changes, and products change. It’s vital that you monitor all three carefully, so you can review your competitive position, and adjust your pricing, if necessary. This must be an ongoing process. Stay ahead of your competition.