Welcome to the obscure, murky, and sometimes scary world of product pricing. If you are reading this, it's probably because I finally got a title catchy enough to draw you in... or like plenty of other entrepreneurs, you are unsure of how to price your product (most likely).
Elementary, My Dear Watson.
As in elementary math and science, which is what most of you probably assume product pricing consists of. But this is not entirely true, and gray areas in business create the obscurity mentioned above. Identifying the perfect product price ultimately rides on how much you understand your target market's behavior. Pricing isn't just about how much the market will bear. Sometimes it's based on emotion and perception, like paying more for an iPhone because of the time and energy that's put into it.
Step One: You Need A Clear Revenue Goal
This is a necessary piece of your pricing puzzle and you should look at it every year, or quarterly, or even monthly. No matter what phase of business you are in, you need to know exactly the amount you plan to (and can realistically) do in sales.
Example: "I want to sell $10,000 a month on Amazon." Let's just say you are selling a $20 product, do the math to figure out how many units you would need to sell to make that amount.
Questions to Ask: Is it possible? Can you sell 500 units a month? What amount does the top seller in your category sell every month?
Goal: Using measurement and indicators while analyzing the viability of your product will help you establish clear revenue goals for each phase of your growth. If your model isn't viable at the $20 price point, but you know the market won't pay $30, you need to reevaluate.
Step Two: Understand Your True Cost of Goods + Business
Your revenue goal will require you to look more deeply at your actual costs, to know whether you can reach margins that make this product worth your while.
Example: You've got your $20 price point which means, to reach your $10,000 a month revenue goal (example from above) you'll need to sell 500 units.
Questions to Ask: What is your tooling and inventory investment? What are your landing costs, which include duty, logistics, and tax cost? What are your warehousing costs? What is your total cost to do business?
Goal: Understand the actual total manufacturing costs, the factory costs, and what your profit margin is added to that.
Step Three: Understand Your Cost to Market Your Magic
You've got a bold revenue goal, figured out how much you need to sell each month, and have dialed into how much it costs you to make, produce, and get your product into your warehouse. Next, it's time to look at marketing costs and analyze how these costs fit into your pricing puzzle.
Example: Let's go back to the iPhone. I personally don't think it's a value, which is why I've never owned an iPhone. That's my opinion, my perception. I don't buy it because I don't see a direct correlation between the time spent and amount charged. As consumers, we get to have ur own perception of brand, our own value point.
Questions to Ask: Do you understand what people think (not what you think)? Do you know what they think is valuable? Do you know what they are willing to pay for? What's their value point? Do they see the value you put into this product?
Goal: Your marketing costs are the part of your pricing puzzle that should absolutely clarify the value in your specific product and plainly prove the problem being solved.
Step Four: Test Your Market
Market testing should not be costly or lengthy, something plenty of entrepreneurs get wrong early. It also doesn't have to land you in "me too" territory. When you test your market, this should help you more easily clarify and identify your top selling points, and your value + price and the perception of your brand.
Step Five: Get to Know Your Competition
You've got your bold revenue goal, you understand your true cost of goods, you've separately factored in marketing costs with a plan of action, and now it's time to check the competition. That isn't just the market competition on Amazon or in Walmart or the one place you are selling right now or will be selling. This is market competition that may not even be direct or head to head. This is a much more comprehensive competitive view.
Goal: Understand your competition across all mediums. Understand where the dollars are being spent in your competitive landscape and see where you fall in this mix.
A Penny Saved, A Penny Earned
Pricing your product may be slightly more involved than anything elementary. It requires clear revenue goals, based on your specific business model and product. It requires proper timing, among other things, to create a realistic profitable pricing strategy that will up your revenue. Entrepreneurs tend to want to throw a dart at a random price point and quickly move out of this phase, without understanding one very elementary fact: proper pricing will make the steps to follow easier and more profitable.