How to Price Your Product

By: Dagmarit Meléndez 
Consultant and business strategist

Determining the ideal price for your product is one of the most strategic decisions you can make for your business. A good price not only affects your sales and profitability, but also defines how consumers perceive your brand.

Today, customers are more aware of the value for their money and are well-informed. Therefore, although setting prices may seem intimidating, it’s crucial not to let this decision delay your product’s launch. The best way to know if you got it right is to launch it and see how the market responds.

Here are some key factors to consider when pricing a new product and how to adjust the price of existing ones to maximize your profits.

• Production costs: First, you need to know how much it costs to produce your product. This calculation should include everything from materials and labor to shipping costs and rent. This number is essential because it establishes the minimum price you can charge without losing money. On this basis, add a profit margin that covers other expenses and provides you with a profit.
  
  
• Fixed business costs: Your fixed costs, such as rent and wages, don’t change regardless of how much you sell. Therefore, it’s essential that the price per unit covers both variable and fixed costs. A good tool is a break-even spreadsheet, which will show you how many units you need to sell to cover all your costs at a specific price.
  
  
• Profit margin: Once you understand your costs, you need to decide on the profit margin. This margin is the part of the sale price that represents your profit. If the margin is too low, you might not cover your costs; if it’s too high, you might lose customers. The key is to find the right balance.
  
  For example, if you have a restaurant and want a 60% profit margin on a main dish, you must calculate all the costs associated with that dish and add a portion to cover fixed expenses.
  
  The math is as follows:

Estimated product cost / (1 – desired profit margin as a decimal) = Suggested product price

If the total cost of a dish is $7.90 and you want a 60% profit margin, the suggested price would be $19.75.

In this example, $7.90 divided by .40 (that is, 1 minus .60, which is the 60% profit margin you want to obtain expressed as a decimal).

You can also consider setting the price using other strategies that allow you to analyze your competitors’ prices and the product’s market penetration. Some tactics include:

• Competitive pricing: In saturated markets, it’s common to set prices based on the competition. You can opt for a lower price to attract cost-sensitive customers or a higher price if you offer higher quality.
• Penetration pricing: Here you start with a low price to quickly gain market share. Once your brand is established, you can increase prices. Be careful not to devalue your product using this approach.
• Value-based pricing: This strategy focuses on how much consumers value your product. If you can demonstrate that you offer something unique, you can justify a higher price.
• Bundle pricing: As the name implies, “bundle pricing” is when you sell two or more complementary products together for a single price. Companies use this strategy to add value for customers at a lower cost, hoping to increase sales and grow brand loyalty.

If you need to adjust the price of an existing product, you should consider the following criteria:

• Cost and profitability evaluation: Regularly review your costs and profit margins. If costs have increased, you may need to adjust prices to maintain profitability.
• Market and competition analysis: Monitor market trends and what your competitors are doing. If they have adjusted their prices, you might need to do the same.
• Customer feedback: Listening to your customers is crucial. If they tell you that your prices are too high or too low, consider adjusting based on their feedback.
• Testing and adjustments: Before making a definitive change, test different prices through promotions or discounts. This way, you can see how the market responds without taking too much risk.
• Transparent communication: If you decide to adjust the price, communicate it clearly to your customers. Explain the reasons behind the change and how it will benefit them. Transparency is key to maintaining trust.

Remember that setting the right price for your product will help improve your business’s profitability. By knowing your costs, understanding the market, and most importantly, listening to your customers, you can develop a pricing strategy that maximizes your profits and ensures your business’s long-term success.

 

The author is the CEO and founder of the accounting and business consulting firm Accounting Experts. She has also excelled in consulting, helping entrepreneurs manage finances, accounting, and business strategies.

This article is for informational purposes only and does not constitute an endorsement or guarantee of accuracy or applicability for any particular purpose. Neither Popular, Inc. ("Popular") nor any of its affiliates, subsidiaries or related companies shall be liable for, any special, direct, indirect, or incidental damages including but not limited to loss of profits, that may arise from of be related to information or advice provided in this article, which was created by a third party. Popular provides financial services and is not dedicated (directly or indirectly) to providing any type of service related to the contents of this article. Should you require any service related to this content, you should seek the advice of a competent professional of your choice. Popular expressly denies all liability for any such advice.