Figuring out your pricing is one of the most important and often daunting parts of your business journey. Ultimately, there's no one magical pricing formula that will work for everyone. The bottom line is to know your costs and test out what the market will bear. More simply, it's important to understand the maximum you can charge without scaring away customers. This is where understanding your target market will come in handy yet again. As I said, there are many different ways to come up with your product pricing. I'll share the factors that we looked at when we built our pricing model.
Look at what your competitors are charging. This gives you a baseline to tell you what customers are already used to paying. Next, think about what value your product adds above your competitors. This could be the size of your product, the taste, the look, your brand story, better quality ingredients, better customer service, free shipping and so on. List out all of those factors for your product versus your competitors and decide where you fit. Calculate your product costs, including material, labor, shipping and associated materials like boxes and tape.
Make sure you include the time it takes you to fulfill orders. Many people make the mistake of not including their time in the cost calculation. It's important to do this because as you scale you'll need to hire other people to help you produce your product and you'll need to pay them. So it's important that your pricing includes some room for this. If you decide to outsource your manufacturing, don't forget to include the shipping costs to get the finished goods to your warehouse. Although you're still in the early stages, make sure you think about the future and whether one day you'll also want to sell wholesale to retailers Wholesale is when you sell a lot of your products all at once to one retailer, they buy them in bulk at a discount, mark up the price, and put them on their shelves.
For example, a single unit of your product costs 20 dollars, all the profit goes directly to you. When you sell wholesale, retailers buy your product in bulk at a discount, maybe 15 dollars per unit, then they put them on their store shelves and charge 20 dollars. For you, wholesale means lower margins per unit, but theoretically it allows you to reach much larger volumes by significantly increasing visibility of your product, which can really help your business.
You'll want to include enough room for a distributor and retailer margin. If you don't know what the rates are, ask other producers in your industry. Remember that each person in the sales channel will need to make money, and if you don't account for those margins at the beginning, often your pricing can be significantly off, which could mean the difference between being profitable one day or not. With all of this information, decide on a price and start testing. You'll need to test out this price with consumers to see if they are willing to pay it.
Testing and adjusting the price is a normal part of the process. But remember that it's always easier to reduce a price than to increase it. Calculate how long it would take you to break even given your fixed costs, such as if you had to rent an office space or studio. This is an important part in validating if your idea can be profitable. Before deciding on your pricing, check in with yourself to see if the pricing feels good. If you feel that you're undercharging for your products, it's important to scale up until it feels right.