How to Price your Products and Services?

Last updated 14 Feb 2020 . 1 min read



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You can sell any type of product but the price that you charge to your customers will affect your business directly. Before pricing your product, you have to know the overall cost of running your business. If the price of the product is less than the cost of making that product then you will have to bear the loss and in the long run, your business might just fail. 
 

The basic rules of pricing a product are quite simple:
 

  • The price of the product should include all costs and profits.

  • Best way to lower your price is by reducing your overall cost.

  • You should keep a check on the prices to make sure that they reflect the overall cost, market demand, supply and profit.

  • Pricing must be done to make sure sales are happening.
     

One simple way of determining what should be the right cost is to first include everything you need to pay for - rent, inventory, loan repayments, utilities, marketing costs, shipping charges, wages and other expenses involved in operating your business. Also, it is important to add profit cost to your calculation, treat profit cost as a fixed cost just like employee paycheques or loan payments. 
 

All of these pricing decisions are a time taking process and require extensive market research, so it is important that business owners work on this if they really want to make profits and be in the business for the long run.
 

Now we know that just hoping for the best outcome won’t get us results, it is important to review your prices so when is the right to review your prices? Do so:
 

  • When you launch a new product or a new product line.

  • When your overall budget changes.

  • When your direct competitors change their prices.

  • When you plan to enter a new market segment.

  • When the economy is going through recession or inflation.

  • When your customers are just loving your product.

  • And lastly when you are planning to change your sales strategy.
     

Pricing of a product can be done in the following ways:
 

  1. Cost-plus pricing 

    The important part of running a successful business is making sure that you always have some extra figures added to the final cost of the product. When you add overhead expenses, there is a high likely chance of you generating a percentage of profit. Many business owners use cost-plus pricing. To understand cost-plus pricing better, take a look at the following sample calculation:

     

Cost of goods: Rs 500

Cost of wages: Rs 200

Plus/overhead/extra charges: Rs 100

Total cost: Rs 800

Profit you want to make: Rs 200

Required selling price: Rs 1000
 

  1. Competitive Pricing:

    Competitive pricing means the price that you charge for a product based on what your competitors are charging. Eg. If all your competitors are charging Rs 800 for a pure silk saree then that’s what you should also charge. 


    It is mostly used when there is already an established price for that particular product or service. This market price is usually set by the market leader and the other smaller companies have no choice but to follow the same market price. Products that are of similar type and come under the same market segment use competitive pricing.


    If you wish to charge your customers higher than the market leader price or your competitors, make sure you are giving them superior customer service or extended warranty policies.


    One last thing that you need to keep in mind before deciding the final price is that you have done a detailed analysis of the target group and the market segment you want to focus on.

     

  2. Overhead expenses:

    As discussed earlier, overhead expenses are the extra charges that are added to the original cost to operate your business successfully. These expenses can be either variable or fixed.


    Variable expenses are the ones which can vary every month depending upon the sale of product or service and other factors like change in the demand and supply, cost involved in promotions and advertising, change of season, printing, packaging costs involved etc. When you are calculating variable expenses try taking an average of the total yearly cost.


    Fixed expenses are the ones which are not dependent on the sales and this cost must be met no matter how much sale is happening every month. Rent, employee payrolls, accounting, legal costs, utilities, insurance or any other liabilities are all part of fixed expenses. These expenses do not change even if the company is not making any profits. 

     

  3. Profit Margin -

    The profit margin is the difference between cost price and selling price, here cost means overall cost regardless of whether you get it from a supplier or manufacture the product in house. Example: If you are selling a product for Rs 100 that costs Rs 600 to your business, the profit margin is Rs 40 or you can say 40% of the selling price.


    Profit margin is the final number that is going to affect all other numbers in your business. If you apply a constant profit margin to the pricing, this will help you make the profits you need to make and draw ongoing plans to make gross profits for your business. Gross profit margin is total sales minus the cost of items sold. For example, in a month if you have sold items worth Rs 2500 and the overall cost involved in selling that product was Rs 15000, the profit margin will be Rs 10000 or 40 per cent. This Rs 10000 can be used to run your business.

    If you want more gross profit at the end of the month or year, adjust the profit margins for individual products. 

    Take the following example for understanding gross profit margin and overall profit better

     

                    Business 1        Business 2

 

Total sales

  100%    

        100%

 Cost of selling 

  40

        65

 Gross-profit margin    

  60

        35

 Overhead expenses

  43

        19

 Net profit

  17

        16



It's important to concentrate on building profits rather just reducing prices to build up sales. In most cases, customers buy from you because you provide better service and offers along with the price. It rarely happens that a customer makes a decision of buying things solely based on the price.

 

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Pooja Singh
A serial foodie. Restless traveller and a spunky techie with an adventurous soul. Writing is my tool for venting.

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Responses

  • M*****
    such a nice n very useful information sharing here thanks a lot
  • S*****
    Fabulous
  • S*****
    Pooja, Good way to calculate your success rate! I always believe that if your product or service is good, you can charge high.