How to price a product

How much should I mark up my product?

Depending on the product and market, it would be normal to sell for twice as much as the product costs you to make or buy. This would be 100% markup or 50% margin, depending which term you use (see end of article).

What product cost should I use?

The product cost should include the costs of delivery to you, any conversion and improvement costs (including labour), and sales packaging. These are the direct costs which vary according to the number of items that you produce.

But your customers aren’t actually interested in how much things cost you, just how much it costs them.

There are two things limiting the price that you can charge for your products:

• Cost restricts the minimum amount that you should charge for a product.

• The maximum amount that you can charge is dictated by the perceived value of your product in the market.

If you set your price too low you’re in a race to the bottom, as you will probably be beaten by larger businesses with better buying power, or by small home-based businesses with minimal overheads who may well forget to factor in their own labour. Pitching low is rarely the right thing to do.

If you set your price higher than the perceived value, then you will fail to sell enough volume.

Who decides the price of a product?

Ultimately your customers decide, but there are ways to increase the perception of your product’s value. Here are some of the factors to consider when determining the price of a product:

• The value of your brand: build a brand or a reputation for your business or the product which draws people in. This is one reason why Apple has people queuing for the release of each new iPhone.

• Quality: improve the product in some way so that it’s worth more to your buyers. This may be an improvement in performance or just appearance.

• Competitors: stand out from your competitors who are selling the same product, perhaps by offering an additional service that helps customers to get the best out of your product.

• Niche: target the exact niche where your product is seen as invaluable. Selling ice at the North Pole could be quite hard work compared to somewhere warmer where there’s a demand for cold drinks.

• Demand: create a demand by focusing on a problem which your product can solve.

• Quantity: it may be tempting to reduce prices for bulk purchases or large customers but only do this for additional sales and not if they would buy the products anyway.

How to determine prices for your product

It may be possible to release a small quantity at different prices to see how much you can sell at each price level. You may find that you can charge different prices to different markets or customers but there are administration costs associated with maintaining multiple price lists.

When you might choose to sell at a loss:

• When you have made a mistake and just need to clear the space and get back whatever cash you can.

• If this happens to you then try to get some other benefit such as payment in advance, at the same time as the order, so that you can move on faster.

It’s always worth planning your business on paper so that you can spot any possible mistakes before you pay out real money.

Markup vs Margin

At the start of this article we mentioned markup and margin. They are both ways that businesses talk about profitability. Here’s what they mean and how they are calculated.

Markup is the amount of profit that you add to the cost to generate the selling price.

Markup = (price-cost)/cost

Margin is the amount of profit included in the selling price of a product

Margin = (price – cost)/price

For example, if you buy an item for £50 and sell it for £100 giving you £50 profit the markup = (100-50)/50=100% and the margin is (100-50)/100 = 50%

Markup is commonly used for setting prices and margin is usually found in accounts.