Pricing your product or service correctly takes
some careful analysis and effort.
Pricing your product or service properly
is key to making a profit and ensuring the
survival of your business. If your price is too
high you will scare off potential customers.
If it is too low you will not make a
profit.
In order to properly price your product
you have to take these things into
consideration.
|
What
Did
It Cost You To Produce The Item:
Your
production cost and overhead cost is a key
element to determining what you should charge
for the finished product.
You have to charge a price to covers your
cost in order to make a profit.
If you don’t you will not have a
profitable business. |
What
Is The Distribution & Retail Markup:
Distributors and Retailers take a percentage
markup in return for distributing and selling
the item so that they can make a profit.
Every entity in the distribution chain will
charge a percentage of the retail price in
return for providing their services.
Distributors can charge as high as 35% depending
on the product. The less entities you have
in your supply chain the more profits you will
be able to make.
Markup is a
percentage of the retail price. For
example, if your markup is 50% and your cost to
produce the item is $1.00, your selling price
will be $2.00. You can chose to add the
packaging & shipping cost to the total
production cost or leave it out if the customer
will be picking up the tab for it.
How
much you markup an item is totally up to you.
Here are some examples.
This example
assumes that you will sell the item yourself:
Your production cost:
|
$10.00 |
You set the retail price at:
|
$40.00 |
This gives you a markup of 75%:
|
$30.00 |
Profit equals:
|
$30.00 |
This
example assumes that you will sell the item
through a 3rd party retail chain.
Your production
cost:
|
$10.00
|
You set the
retail price at:
|
$40.00
|
This gives you
a markup of 75% |
$30.00 |
Sell Price
minus production cost: |
$30.00 |
The Distributor
markup is 35% of Retail price:
|
$14.00 |
The Retailer
markup is 10% of retail price:
|
$4.00 |
Minus
Distributor & Retail markups, this leaves you
with: |
$22.00 |
But Profit
after production cost is taken out only
comes to: |
$12.00 |
Another
way to calculate your retail price including the
markup is use this formula: The markup is
a percentage added to 1 and multiplied by the
total (wholesale) cost to determine the retail
price. For example, if you have a bracelet that
costs $10 at wholesale, and you want to sell it
at 50 percent markup, you add that percentage to
1 to produce 1.50. You then multiply $10 by 1.50
to create a retail price of $15.00.
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What
Is The
Competition Charging:
Examine
what your competitors are charging for the same
or comprabable item.
Ask yourself, are you offering the same
value?
Maybe you can charge more by adding
additional value, such as special features,
customized service, etc.
Remember that your competitors may not
have a storefront, but they may have an online
business. |
Who Are
Your Customers:
What is the average
income of your customers and potential
customers.
If they are in a high income bracket
charging a little more will not have negative
reprecussions.
If they are in a lower income bracket
they will not be willing to pay a higher price.
So don’t reduce your price to the point
where your product or service is perceived as
cheap.
Doing so will drive away customers
instead of bringing them to you.
|
Customers
Perception:
Consumers want to feel
that they are getting their money’s worth when
they purchase a product or service.
Most are unwilling to purchase from a
seller they believe to have less value.
|
Periodic
Review of Pricing Strategy:
Periodically review your
pricing strategy to ensure that your business
remains competitive.
Your competitors are doing the same.
Cost for raw materials and labor changes
over time and hence you have to re-evaluate your
price to ensure that you are adjusting it to
make a profit and stay competitive.
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