How to price your own products: A guide for small business success
When was the last time you took a hard look at your pricing strategy? It’s a critical aspect of your business that often gets overlooked. Let’s dive into how you can optimize your pricing to ensure profitability and growth.
Key questions to ask yourself
Have you considered promotions and strategic pricing when setting your prices?
Are you simply doubling your costs to determine your prices?
If you’re unsure about these, you’re not alone. Many small businesses are running with products that aren’t profitable, which can be a major setback.
Remember: You’re in Business to Make Money
You’re not a public service. Profitability is essential. After your product and branding strategy, pricing is the next most important thing. Once you have your pricing nailed down, you can develop effective promotional and selling strategies. Without confidence in your pricing and margins, you’re in for a tough ride.
Understanding profit
Profit is the lifeblood of your business. If you’re struggling with cash flow, it’s time to reassess your pricing strategy.
What to consider when pricing your products
Pricing isn’t just about doubling your costs. Do you truly understand your costs? Here are some critical factors:
Cost of raw materials: Consider all cumulative costs.
Cost of importing: Factor in any import fees or duties.
VAT: Include value-added tax.
Shipping: Account for shipping costs.
Packaging: Don’t overlook the cost of packaging materials.
These elements will help you determine your gross margin.
What is the perfect margin?
There isn’t a one-size-fits-all answer. While general margin benchmarks exist, many factors influence the ideal margin for your business, such as:
Customer Return Rate: How often do customers come back?
Profit Per Sale: How much profit do you make from the first sale?
Average Order Value: What is your typical order value?
Consider this example:
A business with a 30% margin and an average order value of £200 will struggle if customers rarely return, unless they can continuously attract new customers, which can be costly.
Conversely, a business with a 30% margin and an average order value of £30, combined with a low customer return rate, will also struggle.
However, a business with a 30% margin and a high customer return rate (over 12 months) can generate more cash and afford to spend more on acquiring new customers.
Why a 30% margin isn’t ideal
Scaling and customer acquisition can be challenging with a smaller margin. Cash flow can quickly become tied up, making it expensive to recruit new customers and difficult to manage other costs. Ideally, aim for at least a 50% margin to ensure you have room to maneuver.
How to price your products
Consider the following factors:
Market Fit and Competition: Understand your market and competitors.
Product Positioning: Is your product premium/luxe or standard?
Promotions and Offers: Plan your promotional strategy.
Shipping and Returns: Include these costs in your pricing.
Selling Strategy: Align your prices with your overall selling strategy.
Determine your selling prices by considering all these elements. While there’s no upper limit, be mindful of the general average selling price within your product area. Justify your prices by highlighting the value and benefits of your brand and product.
Honest Assessment of Profitability
Sometimes, after considering all factors, you might realize that your product isn’t as profitable as you thought. This may require making changes or even pivoting your strategy. You can’t keep increasing prices without backing it up with value. If a product can’t be sold profitably, it’s time to reconsider.
Need help with your pricing strategy?
Pricing is often an afterthought for many business owners. If you’ve never revisited your pricing strategy since launching, it’s time for a reassessment. You need to be ensuring your pricing strategy aligns with your business goals and sets you up for success.