Pricing a product can be a daunting task; at the end of the day, the price can sway a consumer to choose your specific product over another’s. Companies need to consider the true cost of manufacturing a product, appropriately and accurately allocating overhead costs to determine the business’s short and long-term strategy for competing in the marketplace.
Setting a product’s price makes a statement to customers about who you are as a company and what you value. Do you want to be seen as a luxury brand? Do you want to gain a competitive advantage by offering your product at the lowest cost? Is there a feature you offer that differentiates you from the competition? Or, are you enticing customers by offering services like free shipping? These are just a few of the many strategies companies use to compete for customers.
Whatever option you choose, it is important to commit. Companies that have staying power in the marketplace set a strategy based on sound theory and solid data. They know the numbers that drive their business inside and out, and they have conducted rigorous market analysis.
Market conditions to consider when pricing your product include the state of the economy, consumer spending habits, your competition’s pricing, and marketing, and the price elasticity of your product. Price elasticity refers to the relation between demand and price. Appropriate consideration of all of these will put you on the right track to the right price!
Factoring Manufacturing Costs
Understanding the market your business is operating in is key to effectively forecasting demand for your product and project sales growth. Effectively predicting sales will assist you in determining the size of the order to place with your manufacturer. Having too much inventory sitting idle on shelves takes money away from operations and marketing. Having too little inventory may result in you not being able to complete orders on a timely basis in which case customers may either cancel their orders or not purchase from you in the future.
The obvious difference between placing large orders with manufacturers is lower unit costs; however, it is valuable to take storage pricing into account. Large orders also take money away from the business’ marketing and operations budgets which are critical in the early stages of sales. They also require greater access to capital which is difficult for small businesses to secure, but fear not- there are cost-effective approaches to getting you the best return on your items!
If you’re like many of the sellers we work with, you started your business out of your home or garage. It’s an awesome accomplishment to grow your business to a point where you’ll need to rent space, but carefully consider how you allocate operations costs so that net sales cover the cost of operations. Or, if you are launching your business with a plan to run it at a loss by offering lower than market prices in order to attract customers and build loyalty, be sure to stick to your plan on how to price a product formula.
This is a good place to talk about allocating your overhead accurately and appropriately.
Allocate Your Overhead Accurately
While your cost of goods sold may be variable (such as manufacturing, shipping, marketing and accounting for returned inventory), most of your overhead costs are probably constant. These include expenditures such as staffing, facilities, utilities, insurance, maintenance, and commodities. However, if you operate in a seasonal business, some of these costs may be variable as well.
Allocating overhead costs can be done on a proportional basis. Most business owners will have a general understanding of which products they can increase their margins on to account for overhead expenses and which products rely on slimmer margins to stay competitive.
Fortunately, many online retailers are able to minimize their operational expenditures by reducing the size of facilities they need as well as leveraging “just in time” inventory management.
Budget for Marketing Campaign Costs and Stick To It
Organic/guerilla marketing tactics have their place in your business’s selling strategy; however, the bottom line is spending on marketing matters and understanding your performance metrics is essential. We’ve seen some outstanding products drive a company out of business because they didn’t effectively promote them with a marketing budget and didn’t analyze their marketing campaign’s impact.
Paid advertising on seller platforms like Amazon and social media sites like Facebook gives your product the opportunity to get noticed not just by more people, but also the right people. Social media marketing allows you to leverage a multitude of data points and target your message to a specific market segment.
It’s important to set and adhere to your marketing budget when boosting posts and leveraging seller platform and social media ads - they are important, but they are just one of a diverse set of marketing tools that can help you increase sales. Others include email marketing, content marketing, and inbound marketing...just to name a few.
Stay True To Your Brand Philosophy Even When It’s Tough
Once you have figured out the total cost of manufacturing, set your marketing budget and allocated your overhead to your price structure, it is a good time to evaluate your product pricing strategy. There are a few good open-ended questions to ask
“What are we?” (Current state assessment)
“What could we be?” (Vision for the future)
“What we must never be?” (Staying true to your brand philosophy)
Answering these questions will help you determine your brand philosophy. Are you positioning yourself as a premium product? In which case you need to communicate quality, luxury and an overall “it” factor. Are you seeking a competitive advantage in the marketplace by being a low-cost leader? In this case, you will need to continually identify cost efficiencies in order to sell at a lower cost while still generating a profit.
Types of Pricing Structures
Here are several examples to help you determine how to price a product formula:
- Cost-Plus - A cost-plus pricing structure is easy to use, but doesn’t account for certain variables like varying economic conditions and current market demand. With a cost-plus pricing structure, a product’s price is determined by adding the cost of materials, manufacturing, overhead, and your desired profit margin.
- Markup - A markup pricing structure increases a product’s price by a set percentage with the goal of covering costs and making a profit.
- Demand - This pricing strategy is rooted in a product’s perceived value, customer demand and available supply. Demand pricing requires a business to understand its product’s price elasticity as discussed above.
- Competitive - Selling your product at a lower cost than your competition
Choosing Your Pricing on Amazon
The Amazon marketplace gives sellers and customers alike a multitude of tools to assess the price, quality, customer service and overall reputation of many competing products and retailers. With this wealth of information, businesses can competitively price their products based on the concepts presented in this article and adjust as competitive, economic, and other factors continually change.
Pricing will determine the longevity of your business as an online seller. It’s important to evaluate both the value you are delivering your customers and the margins you are achieving for your business. Above all else, pricing products needs to be done as a part of a well-thought-out and rigorously tested plan that stays true to your business’ underlying purpose and goals.
As you start your pricing process, remember nothing is set in stone. As your company grows and your costs change, your price might as well. Each item for every individual might be set at a varying value. Do what feels right for your business. Good luck, and happy pricing!