How Should I Price My Product? Avoid Inventory Issues by Getting Your Pricing Strategy Right
How Should I Price My Product? Avoid Inventory Issues by Getting Your Pricing Strategy Right.
You’ve worked hard to create that beautiful, useful, and unique product…and finally, it’s time for it to hit the market! But it’s no surprise that when it comes to retail, the biggest factor that goes into deciding whether or not to purchase a product is how much it costs.
After all the work that you put into getting that final product, you might just feel like your product is priceless—unfortunately, the market likely disagrees with that assessment! So where do you start, when trying to determine the right price for your product?
While there’s no perfect one-size-fits-all formula to setting a pricing strategy, there are a number of factors to consider before finalizing that price tag. While there are a number of pricing guides out there that dig deep into the economics of the equation, our straight-forward guide focuses on the more tangible elements that go into the process, so it feels less textbook—and more human.
Below we dig into all the factors to take into consideration before pricing your product, so you find your profits in the black and your excess inventory in perfect balance.
Key Factors to Consider When Determining Your Product’s Price
When it comes to setting your pricing, research is your best friend. So, get out your calculator, computer, and P&L, and get ready to dig into some details.
Production, storage, and shipping costs:
If you want to turn a profit, you’re going to need to build in some margin, meaning your product price needs to be higher than the sum of what you spend producing, storing, and shipping your product. This net sum should act as a baseline as you determine where to go from here.
Also, it’s important to keep in mind that you may actually have two shipping costs to factor into your pricing—the cost of shipping from your vendor to you AND the cost of shipping to your customers (if free shipping is one of the perks you offer!). While free customer shipping removes a barrier to purchasing for many customers, you should be strategic about it. Consider a free shipping threshold that makes financial sense for your business—or consider building it in as one of your costs.
Value Perception:
OK, it’s reality check time—when you look at your product, are you really being objective? It’s not at all uncommon for founders to be incredibly passionate about their products, become attached to them, and majorly overvalue them for the marketplace. To develop an accurate pricing structure, put yourself in your customer’s shoes.
Ideally during the product development process, you determined your customer segment—now’s the time to bring that factor back into the process. Is your product luxury or everyday? Is it disposable? If you’re charging for a luxury item, your product’s components need to be higher quality and your customer experience unparalleled. Everyday or disposable items will naturally need to be less expensive, but ideally you’ll land on a price point that’s so reasonable your customer doesn’t even have to think about it.
Your Customer’s Buying Power:
Based on your product, who is the end user and how much do they realistically have in their budget for your items? If you price something outside of their means, you’re going to have trouble achieving your sales, which puts your brand at risk for developing a negative perception and relationship with your ideal customer.
Marketing Strategy:
Consider what lengths you’ll need to go to in order to promote your product. Are you organizing a photoshoot? Will you be paying for advertising channels? Ideally before setting a price, you’ll know what needs to be done in order to sell your product, so you can take these added costs into account.
Competitors Prices:
We’ve all price-compared before—and your product will be no different! Before developing your own strategy, make sure to dig into the competition. Unless you’re creating a truly unique product that doesn’t exist anywhere else, checking these benchmarks will offer a similar value to your product. But, if you find yourself wanting to price your products very differently than your competitors, you’ll need to create a compelling case by featuring your product’s differentiators in order to justify the price.
These five considerations should get you in the neighborhood of the right price. And while everyone has a slightly different price-sensitivity threshold, the goal is to get to a price that will spark an automatic ‘yes’ from your ideal customer based on competitor research, without going too low. Because if you price things too cheap, it can create the perception that your product must not be ‘worth it.’
Digging into the Numbers
The above considerations should get you into the ballpark of what your price should be, but you may want to fine-tune that estimate based on the actual costs associated with getting that final product on the shelves. To help you finetune that perfect price, here are the numbers to know:
Product costs:
In addition to the manufacturing, storage, and shipping costs discussed above, consider any additional tangential costs such as raw materials and packaging that need to be accounted for.
Operating costs: Your final product didn’t get to you out of thin air! Consider the effect of point-of-sale systems, purchase transactions, and 3PLs on your P&L.
Vendor minimum order quantities (MOQ):
If you have a specific amount of product you’re required to order from your vendor in order to manufacture your products, you should consider factoring some of that cost into your pricing strategy.
Overall gross margin goal:
When fine-tuning your product’s price, consider how much you’ll truly need to take in—on top of your costs, minimums, and marketing considerations—in order to be profitable!
Ready to set your price?
Determining the right price for your product may take some trial and error, but it’s imperative to try your best to stay objective throughout the process. Pricing your product too high can cause inventory issues, while pricing too low can eat into your margins—ultimately, too much in one direction could result in a fatal mistake for your business.
If you’re struggling to figure out how the numbers will ultimately impact your bottom line or want to avoid dealing with massive inventory issues in the future, reach out to the Boon team to set up a call and see how we can help. By developing a solid demand-planning process, we can not only help make the math “math”, but also verify what needs to happen to result in profits for your business.
