One of the trickiest elements of marketing is learning to determine product cost. Here’s how to determine it so you can price your products correctly.
In this article:
- The Importance of Product Cost
- How to Price a Product
- Developing Cost-Plus Pricing
- Factoring in Value-Based Price
- How to Market a Product
How to Determine Product Cost to Price Products Right
The Importance of Product Cost
Knowing how to price a product can be a complex equation that starts with determining basic product cost, overhead, and how much you’ve spent on promotional mix elements. You’ll also need to research what similar products go for in your selling region.
The general market price is determined by several factors. The key to creating sales is to find the sweet spot between your product cost and what the market will bear.
How to Price a Product
The parts and materials that go into making each unit of your product is just the beginning of figuring out how to price a product, but these are certainly the building blocks of your product costs. Make sure you’re factoring in each element that goes into a unit.
Here’s how you can determine the sales price of your product:
- Divide the pieces you buy in bulk by the total number of units you manufacture using those parts. It’s also important to factor in any non-employees who work on each product, and what their hourly wages are.
- Next, factor in the packaging you plan to use. Often, more than one type of packaging is needed — a bag that encloses specialty rice, for example, would itself be encased in your product’s box. The box will probably get the most attention on your pricing sheet, but it’s important not to forget the bag and any labels or tags that go on that bag.
- Finally, consider the ways that you intend to market the product. Your promotional mix elements consist of some combination of advertising, promotional materials, direct marketing, selling outreach, and public relations.
Overhead can be a more abstract concept, especially if you make more than one product. It’s important to factor in wages, the rental for the space where you make your goods, equipment costs, and the salaries of your regular employees.
Try to pinpoint how much of the company’s time is spent on developing, making and marketing time each product. Then, divide each product by the number of units produced to get a sense of how much the “overhead” line item would be for that product.
From promotional USBs and other high-end promotional items to packaged samples, the giveaways you intend to use as marketing tools are part of that marketing mix.
Items like the materials you use to create a booth at trade shows are also important costs. Print, broadcast and online advertising may also be a significant part of your budget.
Overhead Cost Definition: This is the on-going expense to keep your business afloat.
Developing Cost-Plus Pricing
Once you know how much your product costs to create, make and promote, you’ll have a sense of what you’re spending per unit. Of course, your price should allow you to make a profit.
In other words, the price should be a sum total of your company’s costs, plus an amount that would generate a profit.
This equation can be something of a balancing act. Important factors include what kind of product it is, the manufacturing cost, and how many units you can reasonably sell. All go into determining what you’d need to sell in order to make a profit.
If you hope to sell thousands of jam jars each month, the markup on each jar needn’t be that much higher than the ingredients and packaging.
On the other hand, a specialty electronics product will take much longer to make. For that reason, the markup on the electronics product will be proportionally higher than that of the jam.
RELATED: Getting Product Marketing Right
Factoring in Value-Based Price
You’ve probably already researched what your competitors are charging. (That’s assuming that a similar product already exists in the area in which you’ll be selling.)
Compare your proposed cost-plus target price to these competitors. You’ll soon discover whether that target price is higher, lower or about the same as that of similar products.
- If your proposed sales price is lower than that of competitor items — great! This gives you room to raise your price. Alternatively, you could emphasize your more attractive price as part of your marketing pitch. Ideally, there will be enough room for you to both make even more of a profit than projected, but also boast a sales price lower than your competitors offer.
- If your proposed sales price is higher than the rest of the market, you now have a bit of a challenge. You can go back to the drawing board and figure out ways to cut costs. You can also project confidence that your product is superior, and that customers will be gaining more benefits for the price they pay.
Again, there is probably a compromise price which allows you to do both.
What if your cost-plus price is about the same as the projected value-based price? You may decide to stick with this price, especially if the market indicates that there’s room for all competitors.
You can also look into temporarily cutting your price to build a customer base.
How to Market a Product
If you’re just starting out, you may not have the budget for traditional advertising. Figuring out who your customer is, and where he or she is likely to be reached, is the first step in figuring out how to market a product.
It’s often smarter to spend more of your marketing budget on promotional giveaways, flyers, and some kind of booth setup. This plan represents a more immediate way to reach would-be customers.
Promotional USBs, headphones, Swiss Army knives, and power banks are all examples of quality marketing products on which you can establish your branding. These are the types of goods that customers will use every day. As they do so, the branding reinforces your company and its products.
As you set your sales price, your challenge will be factoring both internal and external factors. Internal decisions include how much to invest in promotional materials and what to spend on creating the product itself.
The external ones are those over which you have little control — the various factors that affect the market price. It’s not an exact science, but one with which you’re bound to become more confident with each new product launch.
How did you determine your product or service’s price? Share your tips with us in the comments section below.