Is the Price Right? We Help You Figure It Out
Photo: Smith House Photography
Innovation often comes out of the darkest times. Uber is just one example of the super successful businesses that launched just after the financial crisis of 2008, and we have no doubt that the next big thing will come out of the COVID-19 crisis.
Has your brain been swirling with ideas during quarantine? Have you found whitespace that you know you can fill? Has being laid off given you the courage you need to finally launch that business you’ve been dreaming of? Create & Cultivate is here to help get your business idea off the ground.
Quarantine is the perfect time to lay out the plans for your dream. While your friends are learning to bake bread, knit, or do yoga, you are laying the foundations for your future (you go, girl!).
Once you’ve got that product idea all figured out, you’ve started your business plan, and you came up with a killer brand name; you’re going to face a super difficult question: Is the price right? Ask people to pay too much for your product or service and they will stop buying. Ask too little and your profit margin slides or customers assume your product is poor quality.
An “optimum price” factors in all your costs and maximizes your margins while remaining attractive to customers. Here’s how to set your prices, and be sure to scroll to the end to shop our Create & Cultivate Marketplace The Launch Your Business Bundle with a step-by-step guide to trademarking your business, a legal checklist for startups, panel videos from past C&C events, and so much more!
KNOW THE MARKET
You need to find out how much customers will pay, as well as how much competitors charge. Simply matching a price is dangerous, though - you need to be sure all your costs - both direct and indirect - are covered.
CHOOSE THE BEST PRICING TECHNIQUE
Cost-plus pricing involves adding a mark-up percentage to costs; this will vary between products, businesses, and sectors. Value-based pricing is determined by how much value your customers attach to your product. Decide what your pricing strategy is before making a calculation.
WORK OUT YOUR COSTS
Include all direct costs, including money spent developing a product or service. Then, calculate your variable costs (for materials, packaging, etc). Work out what percentage of your fixed costs (overheads such as rent, rates, and wages) the product needs to cover. Add all of these costs together and divide by volume to produce a unit break-even figure.
CONSIDER COST-PLUS PRICING
You will need to add a margin or mark-up to your break-even point. If the price looks too high, trim your costs and reduce the price accordingly. Be aware of the limitations of cost-plus pricing, because it works on the assumption you will sell all units. If you don’t, your profit is lower.
SET A VALUE-BASED PRICE
You’ll need to know your market well to set a value-based price. For example, the cost to bring a hairdryer to market might be $10. But you might be able to charge customers $25 if this is the market value.
THINK ABOUT OTHER FACTORS
Can you keep margins modest on some products in order to achieve higher margin sales on others? You might need to calculate different prices for different territories, markets, or sales you make online.
STAY ON YOUR TOES
Prices can seldom be fixed for long. Your costs, customers, and competitors can change, so you will have to shift your prices to keep up with the market. Keep an eye on what’s going on and talk to your customers regularly to make sure your prices remain optimal.