When most businesses price their products they look to their competitors. They want to know how much they price their products so they can sell for a lowers price and sell more. But that’s a horrible pricing strategy. You have to know exactly what you pay to create the product, as well as your overhead, advertising and let’s not forget taxes.
Let’s break it down:
Calculating your overhead
Your overhead costs are things like your: rent, utility bills, insurance etc. It’s going to be too hard to calculate your overhead into the product’s price exactly. That’s why you need to calculate it into the minimum amount of products you have to sell.
This means that if you decide that 100 units are the minimum you have to sell to keep your head above water. The overhead price will be calculated into those 100 units. If you sell anymore, you have more profit. Notice that using this method you create more breathing room for yourself. This breathing room is very important since material prices change quite often and you don’t want to keep changing your price.
Calculating your advertising
most businesses calculate the advertising in their overhead. I don’t agree, the advertising is like the gas peddle in your car. You don’t use the same amount of gas the whole trip. You make sure to use just enough to get where you want as fast as possible without crashing into things.
Same thing with advertising, only here crashing into things results in losing money. You want to get as many leads as you can close and service a month. Only as much as you can service, that’s the hard part. Sometimes this will go smoothly and sometimes it won’t. The lead prices will change, and you still need the work.
This brings me to another important point. Retaining a customer is much cheaper than getting a new one, so you have to give your existing customers a good reason to stay with you.
calculating the production cost
The production cost includes all the raw materials you need to create your product. This also includes the packaging (which can easily be more expensive than the product itself). If you’re a service based business this includes your time.
How do you use this information to price your products?
take the overhead and divide it by 100 (just for calculation sake, it can easily be 1000 or more). after doing that you have an overhead cost per unit, add to that the price of production. now you have your basic price. Notice this does not include advertisements or taxes.
Take the basic cost of the product and multiply it by three. One part is the basic (creation + overhead), one part is for taxes and one for profit. Compare your price to the rates the market is charging for your product. If you see that your way lower then the market allow yourself to raise the price to a point that you are still cheaper. If you’re higher than the price the market charges, that mean the market is wrong.
Remember never go below this price otherwise, you will not make any profit. And don’t make the mistake of thinking that if a company is in the market for ten years they can’t be wrong. sometimes just being the new kid on the block will allow you to see things differently. And that could be the edge you need to survive.
As for your advertisements, they will fit in the crack between the taxes and the profit. And it’s important that they do. You have to feel the pain of losing money on advertisements for two reasons. One is that you will check you providers to make sure those advertisements are worth the money. And the second is that you will understand what a customer means to you, now you will work harder for that customer. Doing everything in your power not to lose him.
A common mistake seasoned business owners make is that they try to get new customers at the expense of losing their loyal customers. This is always a bad idea because a new customer costs money (that money comes out of your profit).
I hope you found this post helpful, if so like it and share it with your friends. And while you’re at it, check out my ebook ‘level up your business’ a guide to starting your own business the right way.