September 10, 2021Inventory
It’s an exciting time when you get to finally launch your new product.
A common question new products ask themselves is, “how much do I sell my product for?”
This might seem like an easy question to answer. But if your pricing is off, potential customers could view you as a cheaper, less desirable product or as something they can’t afford.
To get it right, there are a number of ways to work out what your product should sell for.
In this article, we’ll walk you through a few mathematical equations and tips to help you with your pricing strategy
Step 1: Research
Just like anything in business, research is key.
Try to figure out what segment of the market you are trying to sell in and where you fit in.
For example, let’s say you design and sell wallets. Look at your direct competitors, and use their pricing as a guide to what your product is potentially worth to your customers.
Take a look at cheaper products and more exclusive products and get a rough idea of where you think you fit in and get a rough price in mind.
Remember, this is the most important step. All the mathematical equations in the world won’t give you the exact number your price should be set at.
If your main competitors are priced one way – price similarly and don’t vary off too far.
Step 2: Cost of goods manufactured
The total cost of making/buying your product is your COG (cost of goods).
You need to work out this cost to make sure when you price your product you allow for enough profit to be made.
The equation for this is;
Total Raw Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods
Step 3: Double up
Once you have figured out your COGs, a great place to start determining your wholesale price is to simply double your COGs.
For example, let’s say you have a wallet for which the COGs are equal to $12 per unit.
Your wholesale price would be $24. This will ensure your wholesale profit margin is at least 50%.
Step 4: Your SRP
The next thing to determine for your pricing is to come up with your SRP.
A SRP is your “Suggested Retail Price”. This is the price you suggest your retail customer sell the product for.
Your SRP doesn’t have to be set in stone for your retail customer, however, do not allow your product to vary too much from what you suggest. This can cause problems with customers trying to undercut others that buy from you.
A simple equation can help you determine your SRP, let’s take a look at our wallet example again.
We determined our wholesale price for our wallet was $24 and we want to give our retail customers a 60% profit margin.
Here is the equation:
Convert your customers profit percentage to a decimal – 60% = 0.60
Subtract it from one – 1 – 0.60 = 0.40
Divide your wholesale price by 0.40 – $24\0.40 = 60
$60 this is your SRP
Step 5: Two price Points
Set 2 price points and stick with them.
So now you have both your wholesale price and retail price set.
If you’re going to sell B2C as well from your own storefront or website, stick with your retail pricing and don’t undercut your retail customers. This will cause the majority of your end customers to buy off you instead of your wholesale customers.
Step 6: Pricing tiers
Now that we have determined your wholesale price, a great way to incentivize your customers to buy more from you is to set pricing tiers.
Pricing tiers are a pretty simple concept. It’s when you offer your customer a discount based on the number of units they order. The more they purchase, the greater the discount.
To give you a better idea, let’s look at our wallet example again. Let’s have a look at how we might set the pricing tiers.
Example:
0-10 costs $24 per unit
11-25 costs $21 per unit
26 and above costs $18 per unit
If a customer places an order for 30 units, they would pay:
(10 * 24) + (14 * 21) + (6 * 18) = $642
compared to $720 if they were to pay $24 a unit without the tier structure. The total cost reduces as the customer fills each tier.
Final thoughts
Pricing doesn’t have to be difficult but a bit of time is needed to determine what is best for you.
What’s next?
Are you looking for a better way to get more of your customers (new and existing) onboarded with a signed contract and an ongoing payment method?
Discover PencilPay – a B2B trade portal for better business. If you’re interested in learning more about Pencil, book a demo or get in touch with the team here.