List the Factors to Consider When Setting a Product Price
Setting a product price is an art and a science. It is both a business and a personal decision, factoring in how much you need to earn to make a living, along with your values and marketing messages. Your products can be priced strictly based on financial considerations, or you can use prices to differentiate your company from your competition, or send a message to your customers about quality.
Tip
The factors to consider when setting price include cost and margin, competition and your own discretion.
Pricing Based on Cost and Margin
Your price needs to be sufficient for you to recoup your costs and to earn a little extra in profit. It should cover both direct costs, or the materials and labor that went into producing the item, as well as indirect costs, or expenses such as rent and utilities that you incur to keep your business running. Direct costs make up a fairly consistent percentage of the price you charge.
For example, if you operate a food service business, your food costs should average around 33 percent of your price and labor costs should average around another 33 percent. The percentage of your price that goes towards indirect costs decreases as your volume increases. If your rent is $1000 per month and you charge $3 for a cup of coffee, one third of the purchase price will go toward rent if you sell 1000 cups of coffee per month, and one thirtieth will go toward rent if you sell 10,000 cups of coffee per month.
Research what Your Competition is Charging
Before setting prices, do some research to find out what your competition is charging. Then consider how you want to set your products apart from your competitors' offerings. If your products are very similar, then a lower price can give potential customers a reason to choose yours over the other alternatives. If your product is of noticeably higher quality, a higher price will reinforce this fact, and can even make your offerings more desirable.
Use Your Own Discretion
To some extent, you can charge whatever you want for your products, as long as long as customers are willing to pay and you're asking enough to cover your expenses, along with a little extra. If money is the bottom line for you, try pushing the limits to see what the market will bear. You'll increase your odds of successfully charging a higher price, if you find a way to add intangible value to your offerings, such as by creating buzz, as Apple has done so successfully.
Conversely, if your company's mission is to provide something useful at an affordable price, you may choose to charge less than the market will bear, so that your customers will get the best possible value.
References
Writer Bio
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.