How to Price A Product [Free Calculator & Formulas]
Pricing your products can feel like a loaded job. You need to take many factors into account – how much am I spending in supplies, how much is my time worth, and more. Your pricing structure will also ultimately set the tone for your small business. Are you a luxury brand or an affordable one?
You don't want to over or under price, so here are some tips on how to determine the price of your products.
Already know what costs you need to factor in? Check out our free Product Pricing Calculator.
Establish Your Bottom Line
Calculating exactly how much it costs you to make or supply the item puts you in a much better position to formulate your product pricing. This is often one of the most tedious tasks to do and requires having some numbers on hand. With your records next to you, you'll know the minimum possible price you can charge before taking a loss.
Cost of Materials
Look at how much you spent acquiring your supplies. How much did you spend on everything and how many products can that produce? This will give you your material cost per item.
Don't skimp on these numbers. Count the full cost you paid for your materials (including shipping, tax, etc.). Leaving these out could mean underestimating your costs of production.
Value of Labor
One of the biggest mistakes craftspeople and budding entrepreneurs make when figuring out product cost is not including their own labor costs. There are two ways you can do this.
The first is to set an hourly rate for your time. Choose a wage that you would like to be paid. If each product takes you multiple hours, multiply your hourly number by the quantity of hours it takes. If you can produce multiple products in one hour, divide your rate by the number of products you made.
Alternatively, you can think of your desired profit margin and use that to calculate your value of labor.
Shipping & Postage
Free shipping is a hot topic among the ecommerce community. If you're offering this benefit to your customers, you need to factor that cost in. If customers are paying for shipping, you don't need to worry about adding in this charge.
If you're selling online or processing credit card payments, include those expenses in your product pricing equation. Marketplaces like Etsy charge to host your product, and services like Square can take a percent off the top, too.
Not sure where you should sell online once you have everything figured out? Read our articles, Where should I sell my products online and Should you host your own online store, which analyze each platform and introduce some of the charges you may encounter.
To ensure you're building a proper pricing structure, all of your smaller and less frequent expenses need to be accounted for just the same as those that are larger or more consistent. Consider the following cost categories:
Don't forget to include the costs of building your brand and doing business. This can include business cards, wrapping paper, and mailing labels.
Tip: Keep an eye out for items you can buy in bulk. Product or shipping labels can be bought wholesale, as can mailers or boxes and bubble wrap. Take a good look at what you ship every package with – those items are typically the best to snag in larger quantities for better pricing.
Today, these costs are predominantly digital. They range from advertising on social media (Facebook, Instagram, Twitter, etc.) to running Google Ads, or purchasing space in a magazine. These can be fixed costs or variable based on the time of year, product, etc.
Set Your Markup
There isn't a "standard markup" all small businesses should use, this number varies by industry and type of good or service.
You've probably experienced this in practice – consider the markup on fashion items like watches and purses as opposed to those on household consumables like dish detergent.
We recommend starting between 30% and 50% but have included some helpful topics to help you determine this number. They should allow you to earn a nice profit without pricing your product out of the market, and still give you room to grow. As you build your brand reputation and make a name for yourself in your industry, you can move up to 80%, 100%, or even 300%.
High pricing can allude to better quality. Is your item made of better materials than the competitors'? If so, you might be able to charge a premium. However, if the quality doesn't match the price, you're looking at a handful of unhappy customers.
This leads into our next point – ensuring you price your products within a fair and reasonable range.
Market Price & Demand
Do a deep dive on sellers who offer similar items and see what they're charging. Are there many sellers in the market? How much are they selling? You can utilize online tools like Google Ads to determine demand. Some marketplaces, such as Etsy, are even transparent with how many sales shops have made.
Comparison shopping engines (CSEs) are another way to get a feel for product prices in your industry.
Once you have a feel for the market, consider your options. Do you want to charge less and sell more or charge more and sell less?
Figure out what motivates your customers to buy. Is it price or convenience, quality or consistency? What would they be willing to pay for your product?
Conduct your own market research if you're at a loss. Put together a survey along with some product samples. Let 20 or more customers try your product and ask them to pick from a list of pre-determined prices. This can help you gauge customers' willingness to purchase as well as their perception of your product/brand.
Tip: Make sure to include a wide-enough range to get good results. Very few people will choose the highest cost when given the option.
Add It Up
Option 1: Use Our Product Pricing Calculator
Launch the calculator and enter in the numbers you crunched above. All you have to do is fill in the blanks and choose a markup to get your answer!
Option 2: Try These Product Pricing Formulas
If you want to do the math yourself, add additional variables, or manipulate the weight of certain numbers, here are our three product pricing formulas that will guide your pricing structure.
Step 1: Find your base production cost
Material Costs + Labor Costs + Shipping/Postage + Marketplace Fees + Misc. Expenses = Base Production Cost
Example: $2 for soap supplies + $7 for labor + $0 shipping (charged to customer) + $0 marketplace fee (sold in-person) = $9 base production cost
Step 2: Determine your profit margin
Base Production Cost x Markup = Profit Margin
Example: $9 base production cost x 50% markup = $4.50 profit margin
Step 3: Establish your product price
Profit Margin + Base Production Cost = Product Price
Example: $4.50 profit margin + $9 base production cost = $13.50 product price
We hope the key components in this product pricing guide help you move forward with your business idea. With an arsenal of information, set your pricing and launch your products with pride. Now, go out and make some sales!
Remember that you can always adjust your prices if they aren't working. Don't throw out any of your research or formulas, just update them as you learn.Shop Price Tags