Did You Price Your Product Right? How to Know. These three points shouldn't be overlooked.
By Joe Worth
This story appears in the December 2016 issue of Entrepreneur. Subscribe »
After building your product, pricing it is the hardest puzzle you'll face. Get it right and making a profit is easy. Get it wrong and you may bankrupt your business fast. But it isn't a guessing game; there is a right price, and you can figure it out by answering these three questions.
Related: 10 Pricing Strategies That Can Drastically Improve Sales
1. What's your overall operating budget?
Once you know what your monthly ongoing expenses are, you'll know how much income you need to break even. Just apply that number to your production run. For example, if you plan to produce 10,000 items in a year, you'll know how many you need to sell a year to break even.
With your budget in place, you can then test various pricing scenarios -- charging more and selling fewer units, or cutting the price and going after volume. Whatever scenario you end up following, you know exactly how much you need to sell in order to keep the lights on. As for profit on each sale, decide what works for you: Some models work with razor-thin profits (like Amazon); others enjoy huge margins (like Apple). Both are legit.
Related: Make Sure the Pricing Is Right With These Tips
2. What are your business goals?
If you're trying to build market share quickly, then low prices may work. If profit per sale is more important, fewer sales may work. However, I caution you against starting with low, low prices (or free) in the name of grabbing market share. That makes it difficult to raise the price in the future, unless you add some sort of new or perceived value or benefit. (There are exceptions, as you'll see below.)
3. What do your customers want?
You may think you know, but their reactions can surprise you. One of my clients invented a high-quality medical diagnostic instrument for a very specific, narrow use. When sales slowed after a couple of years, the company dropped prices to undercut its competition. Unfortunately, this made the product look "cheap" to purchasing doctors. I advised a $3,000 price increase, which was a 20 percent jump. The next year the company sold 50 percent more of these instruments. Like I said: Surprise!
Related: Cutting Your Price Has No End But Adding Value Has No Limits
Pricing can be a nerve-racking decision, but remember this: It isn't a final decision. Like my medical device client did, you can change your price later. But make sure your product brings a benefit to your customers. If people love it, they just might be willing to pay a little more for it.
