How to Price Your Products the Right Way: A Guide for New Business Owners

Your product pricing is perhaps one of the most important decisions you will make for your budding business. If you set your price too high, you risk losing potential customers, and settling for a low price can negatively impact your profitability.

That said, there is a lot of merit in investing time and effort into coming up with the right pricing strategy. According to a study by McKinsey, making even a 1% improvement to your pricing can boost profits by 11%.

With that in mind, let us start by understanding the basic expenses that must be considered when deciding product pricing:

What Goes Into Setting a Product Price?: An Overview

When establishing the fundamentals of your business and sales operations, setting the right price for your product is a crucial starting point. What’s more, your product price will influence your profitability, brand position, and customer satisfaction. To begin with, let us understand the formula for calculating product pricing:

Product Price = [(Total Costs) / (1 - Desired Profit Margin)]

With that in mind, let us look at some of the primary factors that contribute to product pricing decisions:

• Cost of Goods Sold (COGS): COGS typically includes every single expense factor in the process of producing the product, such as the raw materials, packaging, shipping, and manufacturing. Use a shipping calculator to narrow down the standard shipping cost you should charge your customer.
• Operating expenses: The costs associated with utilities, rent, salaries, marketing, and software subscriptions that are required to keep your operations going smoothly.
• Desired Profit Margin: The amount of profit you want to earn on each sale, which is typically expressed as a percentage, should also be factored in.
• Market Demand: Understand how much your customers are willing to pay for your product and analyze the current state of the market.
• Competitor Pricing: Identify prices for similar products being sold by competitors to inform your pricing decisions.
• Perceived Value: The unique value proposition or benefits that justify your product pricing.

How to Set The Right Pricing for Your Product?: The Essential Checklist for New Business Owners

Now that you know about the expenses that could factor into deciding your product pricing, let's look at the process of setting the right price for your product:

1. How to conduct market research? What is your competitors’ approach to their pricing?

When starting a new SaaS business, conducting market research is essential for understanding the landscape, trends, and setting competitive prices. You will start by identifying the key competitors and making a list of businesses that offer similar products. Then, analyze their pricing, check their marketplaces, and online stores to spot common pricing patterns such as discounts, bundling, and premium pricing.

Once done, you can then assess the value propositions offered by your competitors to identify what they are offering and what they aren’t, when compared to your value offering. Additionally, consider deploying customer surveys to ask your target market about their pricing expectations and preferences. This could be particularly useful because more than 60% consumers in the UK admit to price being a primary consideration when making purchase decisions.

2. Which pricing strategies should you consider?

Once you have conducted adequate market research, you must consider the pricing strategy to deploy for your product. Some of the popular pricing strategies considered by new business owners are:

Cost-Plus Pricing: Regardless of your product, one of the common pricing models to consider is cost-plus pricing, which includes adding a fixed percentage markup to your costs. You can use a markup calculator to navigate this step efficiently.

Value-Based Pricing: Many new business owners also prefer to set prices based on the perceived value to the customer and the kind of ROI they are likely to get out of it.

Competitive Pricing: Business owners who are unsure about setting the pricing on their own from scratch can price their product in line with their competitors.

Premium Pricing: Business owners who are confident about the value proposition and quality of their product can set a high price to indicate exclusivity or quality.

3. How to test and ensure the effectiveness of your pricing strategy?

Testing your product is perhaps already at the top of your priority list, but the same diligence is required towards testing other parts of your business, such as marketing, pricing, or sales.

There are multiple ways to test whether your pricing strategy works for your product. Some of the common ways are:

• A/B Testing: This test will help you understand how different customer segments respond to your pricing. With this test, you will offer the same product at different prices to varied segments and compare sales.
• Key Metrics Monitoring: You can also assess your performance on specific key metrics to understand the effectiveness of your pricing strategy. Track sales volume, customer feedback, and profit margin to monitor the changes influenced by your pricing strategy.
• Customer Feedback: When you are unsure about the reception to your pricing strategy, it is best to ask the customers directly. Utilize surveys to ask customers whether the price is justified for the product and its features.

4. How to justify the price to customers?

Once you do settle on a pricing strategy for your products, you must successfully market the pricing model and promote it to your customers. Without this crucial step, your customers won’t be convinced about completing the transaction at the offered price.

To succeed in this, your customer communication should highlight the unique features of your product, share testimonials and reviews, and break down the features they get in the pricing provided by you. You can also offer money-back guarantees and warranties to win their confidence and successfully reduce perceived risk.

5. What kind of tools can you use to streamline the pricing process?

If you are still unsure about designing your pricing strategy on your own, there are a bunch of tools that can help you in the process. You can use market research tools, pricing calculators, competitor analysis tools, and analytics platforms to analyze data and come up with the right pricing model or strategy for your product.

Concluding Remarks

Pricing your products the right way can seem complicated when you are just starting your business. However, by understanding the expenses that weigh into it, researching the market, and choosing the right strategy, you can set prices that help attract customers and drive profits. In the end, it is important to remember that it is not a one-time process and may require you to conduct frequent assessments of market and customer preferences.