If you’ve ever looked at the cost of anything you wanted to buy and wondered where the price came from, you’re not alone. When you find a product such as sneakers for a certain price from one retailer and then at an entirely different price for the same exact shoes at another retailer, it can seem like the price is quite arbitrary. In actuality, there is a lot of thought that goes into selecting the perfect price of a product – the equation just might have a different answer depending on the business. If you’re planning on launching your own business around selling products, price determination is important to understand.
Costs and Overhead
Costs and overhead involve the money it takes to run your business. If you’re going to sell products, you first have to either make them or acquire them. Materials cost money, and it costs money to purchase a made product from somewhere else. You also have to take into account variable costs like the bills associated with your place of business, any business loans you have taken out, taxes, payment for employees, monthly utility bills, and replenishing consumables.
The total of your costs and overhead equals what it takes to have your business come out even – if you price your product for sale for that much. However, if you want your business to actually make money, you also need to include profits in the price.
You should decide early on how much of a profit you want to make on each sale, such as 20 percent or 30 percent of the cost. You take this number and add it on top of the total of the costs and overhead. So if it costs you 40 dollars to make a pair of shoes, and you want a 25 percent profit, the final price of the shoes when you sell them should be 50 dollars.
Demand is an economic term relating to how much the public wants the product you are selling. When products are in high demand, people are usually willing to pay a higher price to get their hands on it. For this reason, some businesses will raise their prices for products that are in demand. When there is a surplus or lower demand for a product, the prices will be lower. You may be able to make a higher profit for high-demand products, but it takes some finesse to not overcharge so much that you drive your customers to the competition.
Competitors also play a role in determining product pricing. If you want to bring customers in, it’s important to know how much your competitors are selling the same products for. Keep in mind that your fixed costs and overhead must still be met. If you lower your costs, you can lower your prices and still make a profit and stay competitive.
Determining the Ideal Cost for Your Product
There are many different factors that go into determining the best way to price your products. Consider your costs, desired profits, demand, and competitor pricing. A streamlined manufacturing and distribution software system can help you manage your costs and figure out how to get the most out of your product pricing.