Price Your Product – Basic Methods

Setting the right price for your product or service is crucial to maximizing your profits. But how do you determine the best price to start with? Here are two methods people use to decide how much they will charge for a particular product or service.

Cost-Plus Method

Back in the good old days when people clamored for the latest new product on the market, this method was very popular. It gives you good information and is simple to do.

1. Figure out how much it costs you to deliver the product. Be sure to include:

Cost of making or supplying the product Cost of packaging and delivery Marketing, sales, and customer service costs related to the product Administrative costs and other overhead items like returns, collections, and taxes

2. Decide how much profit you want to make for each product you sell.
3. Add your total cost and your desired profit to get the price you will charge.

This is an internally based method for setting price. You do not need to think about your market at all. You simply create a product, decide on a price, and hope that it sells.

The problem, of course, is that your price may be too high or too low for the market. If it is too high, you probably will not sell much. Surprisingly, if it is too low, you may also lose sales, because people will not value your product correctly.

Success with this method comes from getting an accurate and clear understanding of your costs along with having realistic expectations about the profits you can expect.

Market Method

Another common price-setting method is looking at what people are paying for similar products. This method involves more guesswork and gives you a better idea of how your product will sell. It goes like this:

1. Look for products that are similar to yours. They can be direct competitors or alternatives for doing the same thing your product does for your customers.
2. Get a range of prices based on what others are doing.
3. Decide where you want to be positioned within your market. Will you be a premium provider and sell at the highest price? Will you be somewhere in the middle? Will you be the discount provider in this market?

Position your product and set your price according to your best guess of how it will perform vs. the competition.

The market you choose can make a big difference in your price. For example, suppose you have just written a great book about using Twitter to increase your business. You decide to offer a printed book. The book market has been in place for a long time and people have relatively fixed expectations about prices. People in this market will usually pay between $15 and $30 for a book. Now, suppose you decide to sell your book as an Information Product on the internet. People in that market will often pay $40 to $100 or more. The Information Product market is fairly new. People think about it differently, have different expectations, and are often willing to pay more.

Success with this method comes from selecting the right market, understanding the characteristics of that market, and positioning your product correctly. You also want a clear idea of who your competitors are. This method works best when your strategy is to sell something similar to competitors, with just one or two features or benefits that make your product stand out.

You can often find a reasonable starting price using a combination of these two methods. Once you begin to sell, test everything. Look at your marketing and sales materials. See where sales come from. Tweak your product and the price until your sales are as high as they can possible be.

Regardless of where you begin, intelligent use of trial and error will help you fine tune your product and maximize profits.