How to Price to Make a Profit

You may produce the best products, provide the best customer service, and have an army of the best workers in town, but if you don’t price your products properly, you could have difficulty turning a profit.

Getting your pricing strategy right can make all the difference in the way your business prospers. Proper pricing is part art and part science, and there are a variety of pricing strategies used by successful businesses. Before we discuss some of these successful strategies, let’s look at the two main pitfalls encountered by business owners: Underpricing and overpricing.

Underpricing

It’s tempting to price your products and services low. Lots of businesses mistakenly underprice their products in order to attract business and drive up volume. The problem here is that consumers may view your offerings as “cheap.” Shoppers want to feel that they’re getting their money’s worth, and most don’t want to feel that they’re receiving less value for their money. Also, chronically underpricing your products can have a detrimental impact on your company’s bottom line and perception in the long term. Another reason for underpricing is that clients don’t correctly understand the cost of their products or services. This is discussed further later.

Overpricing

At the other end of the spectrum is the problem of overpricing. Customers are always going to look at your competitors’ prices as well as yours, and if your products seem to be priced unfairly high you’ll see little volume. This is a problem many businesses face when they’re just starting out. They’ve had to cover so many expenses, and they want to clear their debts, but pricing products too high is not the answer.

The Factors That Impact Your Pricing Strategy

You want to make sales, and you want to make a profit. The following factors can help you to settle on the “just-right” price, the sweet spot for attracting customers and turning a profit.

Understand Your Customers

Market research can be extremely helpful when it comes to setting prices for your products. This can be done with informal surveys for your existing customers, promotional surveys on social media, or more expensive research projects performed by consulting firms. Find out who your customers are: Are they budget sensitive? Convenience centred? Do they care about status? The answers to these questions can be very helpful in setting your prices.

Know Your Costs

If you really want to make a profit, you need to know all about your costs. You’ll need to remember that the cost of a product is more than the literal cost of the item; you also need to factor in overhead costs like rent, shipping, and stocking. A good way to come up with the real cost of a product is to create a spreadsheet that includes the following:

• Actual product costs, including labour and the costs of marketing and selling
• Agents fees, rebates, discounts
• Debt service costs
• Employment costs – including a cost for the owner if not at market rates in the P&L
• All operating expenses
• A return on the capital that you and the shareholders have invested
• Capital for future expansion and replacement of aging assets

The total of all of these line items will give you a good idea of the gross revenues you’ll need to generate in order to cover your costs.

Create a Revenue Target

After you know what your costs are, you can create a revenue target for how much profit you want the business to make. Estimate the number of units you expect to sell in the next year. Divide your revenue target by the number of units you expect to sell and you’ll have the price at which you need to sell your product. It gets a bit trickier if you sell many different products. In this case, you’ll need to allocate your overall revenue target by each product.

Understand Your Competitors

It can be very helpful to know what your competitors are doing because your customers most certainly will be making comparisons. While it’s wise to compare product prices as an initial gauge, you’ll have to keep in mind that there may be big differences. Try to compare net prices, not just list prices. This might take some investigative work: secret shopping, phone calls, etc.

Evaluate the Market

You can’t know the future, but you can keep a close eye on the market and respond accordingly. Knowing the fluctuations in prices of your raw materials, changes in consumer taste, and even the way your competitors respond to price wars or the introduction of new products can change the way you operate and help you to keep your prices where you can make a profit.

All of these factors contribute to the way you price your products. You should test your prices on a regular basis and test new offers to see how they affect your bottom line. Watch your sales volumes carefully, and be relentless in the managing of your product pricing. Reach out to us for advice or consultation about pricing your products to make a profit. We’re happy to help.