What is your product worth? For many business owners, that’s a tough question to answer. Finding a price point that delivers a good margin without scaring buyers away is a challenging prospect. Add a wholesale channel and you complicate things even more. Do you price like your competitors, or simply take your product costs and multiply by two? And, what if you’re selling a handmade, artisan product? How do you factor in that one-of-a-kind value?
The reality is, there’s no single hard and fast rule.
We spoke to some FedEx Small Business Grant Contest winners as well as a notable industry expert to get their insights on product pricing — what they did right, what they did wrong and points to consider.
Know Your Costs
The key element of any pricing strategy is actual product cost. This calculation includes the materials and labor required to get your product produced and packaged, as well as overhead costs, like rent, taxes, insurance, utilities, marketing, legal fees, travel expenses and supplies.
One of the biggest mistakes new entrepreneurs make is not factoring in all of these costs, and underpricing their product, sometimes to the point of losing money on each sale. Such was the case of new business owner Darrell Sprattling, founder and creator of Pi-bytes; unique, gourmet mini pies that are smaller than a regular pie, but large enough for two people to share.
“Early on, I was so eager to get people to try my Pi-bytes, and so determined to make my business work that I didn’t put enough thought into pricing,” Sprattling said. “I didn’t factor in the ingredient costs, or my time to make them or the fact that they were unique in the market. I just looked at a box of pre-packaged mini pies at the grocery store, and started charging the same thing. “
The good news was, a lot of people tried his sweet treats. The bad news was, by selling his products at just $2.50 each, Sprattling lost money on every Pi-byte he sold.
“I eventually raised the price to $5.00, without any negative impact on my sales,” Sprattling said. “It seems my customers realized the value of my products more than I did.”
Understand Your Target Customer
In addition to understanding what it costs to make your product, you have to know your target customer. Who are they and what are they willing to pay for your product? Does it solve a particular problem, or is it something they can’t get anywhere else?
“Our fair trade accessories and clothing are artisan made in Morocco, so we can’t produce a lot of volume,” explained Heather O’Neill, co-founder and production manager for Mushmina. “Our customers are buying something they can’t get anywhere else, something that is unique and has a story behind it. All of that gives our goods more value.”
O’Neill admits that pricing these artisan products hasn’t been easy.
“Consider jewelry, for instance. Jewelry can have what is considered a blind mark up, because people can pay anywhere from $50 to $250, depending on perceived value,” O’Neill said. “We have adjusted our prices many times to get to the right spot.”
Know How You Compare to Your Competitors
Once you’ve identified your target customer, the question becomes: ”How many other companies are competing for that customer with similar products? And, what do they charge for those products?”
“If you have competition, and you’re doing something better than the competition, you have to be able to articulate that value and price accordingly,” explained Ari Hoffman, owner/advisor of GOBIE h2o. “When we brought our eco-friendly water bottles to the market, we had to explain why they were different than the other filtration products out there. Consumers had to understand why our products were better — better than single-use plastic water bottles and better than other portable filtration options.”
However, no matter how much better your product may be, you can’t price yourself out of the market. A consumer may be willing to pay 20 percent more for a better quality product, but 60 percent more could be a deal breaker. Again, it all depends on the target customer, the product, the market need and the competition.
Wholesale, Retail and Online — Oh My!
When you sell through wholesale, your own retail channel and an e-commerce site, pricing becomes a tricky proposition.
“We not only have to sell to our wholesalers at the right price, which is 2.5 to 3 times less than retail, but we also have to make sure our own retail store and e-commerce site don’t erode their sales,“ said Katie O’Neill, co-founder and creative director of Mushmina. “We can’t have a handbag on our site that’s lower than our wholesalers are pricing it in their stores.”
To keep the relationships with their wholesalers strong, and still run a profitable online business, the O’Neill sisters offer their online customers coupons and other promotions. So, they reward loyal customers with discounts without lowering the prices of the merchandise itself.
Pricing for the Export Market
If you’re going to take advantage of opportunities in the export market, your overhead, as well as the costs to produce your product, will likely increase.
“If small business owners really want to capitalize on the export opportunity, they will incur some additional expense. They’ll have to fly to their target countries, meet with buyers, and support their buyers’ distributors with marketing materials — unless they’re selling a single or small number of items via e-commerce. They may have to adjust products or packaging to meet certain requirements, as well. None of that is free,” said Douglas K. Barry, deputy director, U.S. Commercial Service. “There’s also the cost of shipping and insurance. All of this has to be factored in before you determine your pricing strategy.”
The strategy depends on your target market and the type of product you’re selling.
“Once you determine the final cost of product, then decide whether you’re going in with premium pricing for fewer sales at higher margins; or if you want to go in with lower pricing to establish a market share,” Barry explained. “Most small businesses don’t have the production capacity or the cash reserves to make a market share play. And most businesses that succeed in the international markets bring something new and unique to those markets, so value-driven pricing is the norm.”
Foreign buyers are typically responsible for paying duties and taxes on imported goods as well, which can add as much as one-third of the cost of the item. After all of these considerations, it all comes down to one thing.
“You have to determine whether the consumers in the country you’re targeting can afford your product after all the costs are factored in,” Barry said. “Look at your market, look at what people in those countries are paying for items in the same category. I think a lot of small business owners are surprised to learn how much foreign buyers are willing to pay for American-made goods, and the type of margins they can command. The real key is identifying the need, the pricing and the market potential upfront.”
Continually Monitor Pricing — and Adjust as Needed
Finally, don’t look at pricing as a “once and done” prospect. Continually analyze the profitability of every product SKU you sell every month. If you’re losing money on a SKU, something has to change. You either have to raise prices, reduce the amount you spend on producing that product or determine if that product is still a relevant part of your offering.
Although there’s no fail-safe way to determine product pricing, by knowing your costs, your markets and your customers, you can find the number that’s not too high, not too low, but just right — for your profitability, margins and customer’s pocketbooks.