Cheap things are not good; Good things are not cheap.

Chinese Proverb

How can I estimate the best price for my product? Should it be the same as my competitors or higher? Will I sell products if my price is higher? All of these are common questions to have when you are opening your business, and pricing is a key part of your business strategy. Depending on your type of product and market, establishing prices will vary significantly. In this post, a step- by -step guide with some examples on estimating the best price for your product.

Table of Content

• Elements of Pricing
• Types of Pricing Strategies
• Direct Price Calculator
• Additional Guidance in Estimating the Best Price for your Product

Elements of Pricing

Price is one of the main elements of profit. When you are looking to increase profit, you will usually do it by three ways, decrease costs and expenses, add new products that do not take market from existing products or by increasing prices.

But to be able to increase price, you will need to know of what’s built. Let’s talk about its elements:

Direct Cost

Direct cost is money spent directly in your product. Let’s use a flower arrangement example to estimate direct cost.

• Flowers and fillers that become the composition of the arrangement. (without doubt the most important part of the product, as it is what it makes it a product)
• The base of the arrangement, will also determined other direct costs, like if you choose a hat box, you will then need to use a flower foam. But if you use a glass vase, then is just water and maybe a tablespoon of flower meal.
• Sometimes even salary, if you know the cost per hour of the designer or you are the designer, you should include your salary as part of the cost by dividing the total salary by the time spent in completing the arrangement.

Note: The more you add to your product, the more direct costs you will have. Usually, Direct cost is related to variable cost, mostly because it varies with your product, for example packaging expenses. A good measure of direct costs is that you will be able to tie it directly to your product. It is usually variable because it depends on how much you use per product and how much product you actually sell.

Indirect Cost/ fixed Cost

Indirect cost is money spend you cannot directly trace to your final product. Continuing with the flower arrangement example, this will be instagram advertisement, the cost of floral scissors, paper, and all administrative expenses. Also, utilities bills like internet and electricity. This type of cost is usually related to fix cost, which is the cost you will have regardless of how much product you sell. When estimating the best price for your product you need to be aware of fixed cost. You can have a good ratio price for your product, but a bad management of fixed cost will ruin you.

Break Even

Break even It’s the amount of units you need to sell, to cover both your direct and fixed costs. Anything additional, will be profit.

Margin or Markup

Margin is what you make per product you sell. Let’s not confuse this element with profit. Profits includes margin less administrative and other expenses. If we continue to follow our flower arrangement example, margin is what you make per each flower arrangement you sell. But it is not profit, your margin has to be enough to make you a profit after fixed expenses. Margin is compose of prices times every product you sell minus direct cost, as shown in the image above

Many new entrepreneurs make the mistake of only considering Revenue or sales as their north. However, to be a successful entrepreneur your north has to be compose of too many other things. And all of those other things, start right here, with pricing. So now, let’s learn a little bit about the types of pricing strategies that will guide you in estimating the best price for your product.

Types of Pricing strategy

Direct pricing

Direct pricing is the most common pricing strategy used in the market and the most taught in business classes. Most of the calculators publish in the web used this strategy, mainly because it is easy to use and considers the main elements of cost accounting. As we mentioned before, your price needs to cover both variable and fixed costs, and using this strategy will give you that.

First, track your variable expenses or cost per product. You need to know all of material that goes into the final product. As a small entrepreneur or artists we get caught with designing, and do not measure the amount of material going into the final product. This is even more important when you do not use all the materials from one package for one final product. It’s what happens with a flower arrangement. Depending on the design, you might not need all the roses in one package, this will help you save money and materials. But more importantly, better estimate your prices.

Second, you need to have an expectation of how much you want to make per each product. What do we mean with this. It’s a percentage. Instead of saying an expectation, I will say, do a try and error with this value, with our calculator. Do at least 3 scenarios, and then do a Market Benchmark strategy.

Third, calculate your Break even. Know the number, in each pricing scenario you run. Use your knowledge of the market, think and analyzed how much do you expect to sell realistically . And then, run the scenario again. Analyze what costs (direct or indirect) you can eliminate without compromising the value your product provides.

Market Benchmark

Use an average price from your closer more establish competitors products. And while this is an easy strategy, you still need to be aware of all of your cost. Is recommended to only use this strategy once you have estimated your direct price and compare it to similar products or product substitutes. If your price is too high in relation to the market, then you need to make sure of mainly two things:

• The quality or design of the product makes up for the price increase (for example: apple product)
• Your product solves a problem more effectively than other products or substitutes products.

If this is not the truth for your product, then you need to revise your costs, and decrease where able. Some strategies for this are:

• Change packaging
• For Flower arrangements, mix high quality blooms with low prices more common fillers
• Negotiate discounts with your suppliers
• Be more efficient utilizing your materials

If you can’t use any of these strategies, then you need to sacrifice desired margin.

Subscriptions and membership:

This pricing strategy is getting popular right now. Is how most magazines worked for years, but in recent years has become popular with any other type of products like flowers, and gift boxes. The best benefit of this strategy is the continue stream of income, every month as it generates loyalty. Sometimes it could be referred more as a selling strategy than a pricing strategy.

Estimating subscription and membership princes, uses some of the same concept and steps mentioned above with just a few variances and more judgment and knowledge of the market you participate. For either strategy you choose, in order to be successful (meaning you make a profit), it has to cover for direct and fixed costs, and has to generate your desired profit, hence the steps are as follow:

First, use the price calculator explained above. This will help you visualize the how much expense do you need to cover. If your product is a blog or content creator, they the main material into the calculator is your labor. The units required to sell, is the quantity of subscribers you need a month to break even.

Second, do market research, search similar products or blogs, subscribe an see the quality of the product. This will also help you determined if you need to match your competitors price or if you increase it.

Third, make sure that your client see the benefit against purchasing an unit every month. Usually, a client is willing to pay for membership because it sees saving in doing so, hence to maintain a continue subscribers based, you will need to sacrificed on monthly margin.

Additional guidance in Estimating the best price for your Product

Price setting is never a one time activity and it is not static, is very very dynamic.

• You need to put your product in the market and learn from it. What did your clients like? what did not work? how can you improve? The answer to all of these questions come from trial and error, and will be a key factor in estimating the best price for your product.
• Leave room for occasional sales and discount offering to special clients. Meaning, never tag a price at break even.
• You will need to mix pricing strategies. Using both direct pricing and Membership is more common now days than ever.
• When you are starting, you might need to settle with Market Benchmark. Once you start gaining popularity, you will be able to increase prices without sacrificing customers.

What has been you experience estimating prices for your products? What other questions do you have when estimating prices?