How to Price a Product or Service?

Many businesses fail due to a lack of cash flow. Maybe the demand for your product or service is lower than expected or operating costs are too high. However, there may be another explanation for the unforeseen closure: poor pricing. Pricing your product or service is one of the most important aspects of running your business.

Overpricing your products leads to no demand while underpricing can generate an operating loss. Finding that happy medium is essential, making it important to analyze costs, look at your desired profit percentage, and factor in inflation.

Analyze Costs

The first way to price your product or service is to analyze the costs that go into making the product. Make a list of both your direct and indirect costs. Direct costs are those that directly relate to the production of your product or service, such as warehouse labor, shipping, and material costs. On the other hand, indirect costs are expenses that aren’t directly related to the production of your product, such as advertising, office wages, and bank fees.

Adding up the expenses for each of these categories will tell you what your breakeven cost is per item. For example, let’s say you have $10 in direct materials and $5 in indirect costs. This means that your pricing should be at least $15 to break even. Many business owners add a certain percentage on top of these costs to price out their products.

Look at Desired Profit Percentage

The next way to price your product is to work backward by setting an expected profit percentage. Let’s say you want to make a 30% profit for the year. This means that for every $100,000 of revenue, you will need to have only $70,000 of operating costs to arrive at a $30,000 profit. You will still need to analyze your costs as we did above to find out where you can expect expenses to fall.

Factor in Inflation

Inflation is another factor to take into consideration. Each year prices increase to adjust for inflation. As a result, the pricing of your products should be increasing each year. Although you may have a higher revenue, you aren’t actually generating a higher net profit, since the costs of producing your product will rise as well.

Look at the annual inflation metrics produced by government bodies. Then, consider increasing your product costs by that amount or a few percent more to grow your business. Keep in mind that as your expertise in your field grows, so should your prices. An established business can charge more compared to a new startup.

IN SUMMARY:

Understanding how to price your products or services is critical to generate enough revenue to keep your business afloat. To talk over your current pricing structure or find the right method to price new products, reach out to the experts at Divocate Consulting. Our team frequently assists clients in working through how to maintain their business through the proper pricing. Reach out today to set up a consultation.