Setting Price
What is the first step in setting the price of a product?
The first step to setting the price of your product/service definition
When you’re developing a new product or service, setting the price can feel like a balancing act. Too expensive, and you might price out some of your most valuable customers. Too cheap, and your product may be seen as a budget or low-end option, limiting your reach. So how do you strike a balance? The first step in setting a price is always to discover your baseline pricing. This means the amount you need to charge to recoup your development costs and break even on each sale. From there, you can use several strategies to arrive at the correct pricing for your product.
How do you set a price for a product or service?
Of course, setting the price of a product isn’t always as straightforward as assessing cost and adding a profit margin. There are many factors at play. You have to consider the value you’re delivering, the position of your brand in the market, and your competitors’ pricing strategies.
All of these factors should allow you to arrive at a single price for your product or service, but don’t forget that nothing is set in stone. It’s here that small-scale pilots and pricing trials can help you understand the potential of a particular price point or pricing strategy. Just remember that, once you hit the mass market, it can be very tough to make significant pricing changes without upsetting existing customers.
How to calculate a selling price
Generally speaking, you can calculate your selling price like this:
Cost price + profit margin
In this case, the profit margin is a percentage of the cost price you decide you’d like to make in return. So, as a basic example, if your product costs $100 to develop, you could add a 40% profit margin to arrive at a selling price of $140.
Product pricing examples
Here are a few key strategies you can leverage when setting the price of your product or service:
Competitor-based pricing refers to the process of taking into account the price charged by your immediate competition, averaging it out, and pricing your product either higher or lower depending on your positioning in the market.
Cost-plus pricing is the gold standard of product pricing. It refers to the classic formula of selling price calculation: taking your product cost and adding the desired profit margin as a percentage of that cost.
Value-based pricing is a little more nebulous than the other strategies we’ve looked at because the product’s price is based on the value it delivers to the customer — not just the raw cost plus margin. Value is highly subjective, meaning brands positioned at the top of the market may charge far higher prices for a product that is objectively the same as a lower-priced one.
Target costing is almost the reverse of cost-plus pricing. It looks to devise a target cost rather than a target price. Target costing works by taking the desired profit margin from a target market price to deliver a goal cost price for the product.
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