Over the years, we’ve sold a ton of different products here at Boom Social.
Something we’ve learned is that there’s no “one size fits all” strategy for pricing. No two products are exactly alike, and your pricing will also depend on your goals for a particular product or service.There’s no “one size fits all” strategy for pricing. No two products are exactly alike. Click To Tweet
For instance, some of our products were intended to be used for customer acquisition purposes. In these cases, we used our products as loss leaders – meaning we actually sold them below cost.
In other cases, we’ve based our pricing on the value the product provides to our customers.
In any case, it’s important to have a framework you can use to come up with a basic pricing structure. This post will offer the “secret sauce” that will help you set your prices!
Determine the COST to create your product or service
Determining the cost of a tangible product is relatively simple. For instance, if you design clothing, you’ll include costs like basic materials, printing costs, shipping costs, etc.
You’ll also want to factor in some portion of the other costs you have that aren’t directly related to your product. These costs might include rent, the cost of buying a printing machine, insurance costs, etc.
If you provide a service, it can be slightly more difficult to determine your costs, as this requires you to assign a dollar amount to your time, skills and expertise.
For services, there are two main costs I recommend calculating:
#1 The value of your time (i.e. If a job takes you 3 hours to complete and you value your time at $30/hour, you would charge $90), and
#2 The hard costs of supplies used.
Once you’ve come up with the base cost of your product or service, you now have your breakeven amount. This is the amount you should never go under…unless of course you’re using your product as a loss leader.
Add a markup to your cost (optional, and not always recommended!)
Many business owners stop here. They determine their costs, add a modest markup, and this is where they set their final price.
This is known as a cost-plus pricing model. When done right, this strategy can work very well. Unfortunately, I find many business owners end up significantly undervaluing their products or services using this strategy.
The reason is this: they’re pricing their products on what they think is a reasonable amount instead of what their customers are willing to pay.Don't undervalue your product! Price your products based on what your customers are willing to pay.Click To Tweet
And if your customers are prepared to pay a premium for your product – because it’s the best product available on the market, for instance – you’ve just forfeited a whole bunch of money.
Determine where you want to position your product in the market
Assuming you’re choosing not to use the cost-plus model (step 2), your next step will be to determine where you want to position your product or service in the marketplace.
You’ve probably heard the term “unique selling proposition”. Your USP is basically what makes your product or service special or unique relative to the competition.Determining your USP (unique selling proposition) is key to knowing how you should price your products.Click To Tweet
For instance, if your USP is that you’re the most affordable caterer in the tri-cities area, you know you need to set your price lower than the competition.
But if your USP is that you provide luxury gifts for corporate functions, your target market (corporations) would expect to pay a premium for your high-end offerings.
Determine the VALUE of your product or service to your target market
You’ve now determined your absolute bottom price or rate (your cost). You’ve also identified approximately where you want your pricing to fall relative to your competitors.
But what you want to figure out next is how much your product or service is actually worth to your customers or clients.
There are a number of strategies you can use to start to figure this out.
#1 See what your competitors are charging for a comparable product or service.
If you determine that your competitors are typically charging $50 for their product, this gives you a sense of what the market is willing to pay. Of course, you’ll also have to consider your UVP/price positioning to know if you want to charge the same, less, or more than your competitors.
#2 Send out customer surveys.
Send clients or customers a survey to get their feedback on your offerings. Ask questions like: Do you feel you got fair value for the price? Do you plan to purchase this product again in future? Why or why not?
#3 Determine what your own customers or clients have been willing to pay in the past.
If you’ve sold comparable products in the past, you already have a great baseline to build on.
For instance, let’s say you’ve offered two similar services in the past, each at a different price point. The $100 service was very popular, with 60 clients signing up. This earned you a total of $6,000.
The $300 service was a bit of a harder sell, and you ended up getting only 35 clients at this price point. However, your total earnings were $10,500, far above the $6,000 you earned by setting your rate lower.
This gives you a great idea of which price point makes the most sense for your business!
Keep in mind that there’s no surefire way to set the “perfect” price for your products or services. When it comes down to it, you can never know exactly what you should be charging until you choose a price and run with it.
This is why it’s so important to continually monitor your sales and customer feedback. Based on what you’re seeing, you can then adjust your pricing to optimize for optimal user satisfaction and revenue.
How do you determine the price of your products or services? Care to share your “secret sauce”? Leave a comment below!