YOGYAKARTA - Determination of the price of a product is one of the foundation decisions that you will make as a business owner. The pricing model you choose affects almost all parts of your business. Then how to determine product prices?
It also affects your customers. Price sensitivity is one of the key factors around the company's price choices. Customers get good information about their purchases now, and they are sensitive to prices because they want maximum profit for their money and time.
That's why it's too easy to get caught up in pricing strategies when you launch a new business or product, but it's important not to let those decisions stop your launch. The best price data entrepreneurs can get is from launching and testing with real customers. Market research of course plays a role, but in the end, your pricing must be based on what your customers are actually willing to pay.
Charge variables per product
The cost of variables is directly related to the product. It's very easy to determine the basic cost of the product if you buy an inventory, but if you make it yourself, the cost of your product is the price of bulk material divided by the amount of goods produced.
Next, look at wages per hour or daily, and share with the amount of goods produced at that time. Finally, consider packaging and bonuses. Use unit prices to calculate inventory shipping costs and branded "free goods" (such as stickers or printed coupons), and add a fee specified by your delivery service.
Add your profit margin
The profit margin is the percentage of sales which is an advantage. For example, if a product with a total variable cost of $10USD sells for USD$2.50, the profit margin is 20% (profit $2.50USD is 20% of sales).
If your target is a 20% profit margin, you can work backwards to determine the price using this formula:
Price = (total variable cost) / (1 - 0.20)
If the calculated price is much higher than the average price of your competitors, you may need to reconsider your production costs. If your price is low, you may be able to plan for a higher profit margin.
Factors in fixed cost
Fixed costs are related to your business function and include items such as insurance, rental, license and software license, as well as payroll fees. Finding out your total fixed costs within a certain period of time will tell you how much sales you need to make to break even.
Test and adjust
You need to give your product time to understand how customers respond to price fixing. Usually, conducting a quarterly review can help you measure customer interests and satisfaction.
If you find sales lower than required after a quarter with your products or services set at a certain price, use your industrial knowledge to determine whether that means raising, lowering, or cutting your own costs.
The best practices to determine the price of your product
Before you set the final price for a product, it is better to do research and follow some of the best strategic practices.
Understand the strategy of setting general prices in your industry
The pricing of your product requires a background knowledge of your industry. Compared your product to the same one in the market to determine the average price range. If your product is of higher quality, customers may be willing to pay slightly more expensive. If your product doesn't have all the bells and whistles, you may be able to compete in price with a bigger competitor.
Doing market research
Your customer base is your best guide for what works and what needs to be changed. Market research, whether done internally or outsourced to market research firms, will give you important insight into what your customers want and what your competitors offer. This information will also serve as the basis for your pricing strategy.
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