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How Your Costs Impact Your Sales

Have you ever wondered what to charge for your products? Charge too much, and nobody will buy. Charge too little, and you won’t make enough to continue selling products. But finding the sweet spot when pricing your products is hard. So how can business-people determine how to price their products or determine how much to mark them up?

Find Your Cost First, Then Your Selling Price

When deciding on a price for you product, or how much to mark something up, the most important thing is determining how much your product costs you. If you pay $10 for the supplies to make a single gift basket, you may think your selling price shouldn’t be much higher, but don’t forget; you also have to add in any other factors that increase your costs. For example, how much electricity do you use to assemble each basket? How many labor hours does each require, and how much does that cost you on average? Finding a price to sell your product for is much easier once you know where every penny spent in the process goes, and what it goes for.

 

Understand Your Customers

After determining the true cost of a product, decide exactly who will be buying your product. Can your customers afford your prices? Will they happily pay for the quality and benefits your product offers, or will they feel taken advantage of and cheated? Having a thorough understanding of your customers is not only critical in running a successful business, but also helps you find a price customers will happily pay. Say each widget costs you around $13.50 to produce. Unfortunately, your market research indicates customers will be willing to pay only $11.50 per widget. What should you do?

Perhaps the best option would be to reexamine your production methods, and try to find ways to reduce your costs or increase efficiency. Even if your customers are happy with prices, and your products are flying off the shelves, reducing costs is always a great way to increase profits. You could also reduce your prices, and try to sell customers on other items with a higher margin, but be careful; if you’re selling a product for less than it costs you to make it, you probably won’t earn enough profit to carry on.

 

Know Your Competition

If your customers can buy the same thing from someone else for less, don’t be surprised if they do. That doesn’t mean you have to charge the same as your competitors, but you do need to ensure customers understand why you charge what you do, and the value they’ll get for their money. Most customers would prefer to pay more for a better product than save money on something that doesn’t solve their problem.

Ensuring customers clearly understand how your product will benefit them is your most important job, and failing to do it could have disastrous consequences for your future success. Know your competitors, better than they know themselves if possible. Find out as much as you can about their products, prices, and services, then find a way to surpass them. Don’t just say your product is better; be able to show how your product is better. Being able to convince your customers that you offer the best solution to their problems takes time and research, but will pay off big if you do it right.

One of the oldest ways of collecting information about competitors is still one of the best; call them and ask. If you can’t, there are typically many online resources that will give you an idea of what similar products are selling for, and the features and benefits they offer. Try looking at eCommerce sites, forums, and product review sites to find information about competing products, as well as user feedback. Finding where your product fits in among the competition will make it much easier for you to determine an appropriate price, as well as set you apart from your competitors. Understanding your uniqueness also helps make sales, as being able to show customers your product’s superiority has always been a highly-successful selling tool.

 

Prepare for the Future

Having an idea of what the future holds for your product or industry can also be very helpful when trying to determine a price. Ask Blockbuster. This once successful video-rental company has been nearly wiped-out by the rise of online video streaming. Don’t fall victim to fundamental shifts in your customer’s behavior; educate yourself about the problem(s) your product helps solve, and be aware of any improvements that could solve it in a different way. As an added bonus, keeping up to date on your industry or target market may give you opportunities to market products your competitor’s haven’t even thought of yet.

 

Bringing It all Together

There are so many different factors that go into determining a price or mark-up for your product that it’s impossible to cover them all in an article. But if you know your product, your costs, your customers, your competition, and keep a close eye on your industry, you’ll have much of the information you need to properly price and mark-up your products.

 

by Eric Streeter
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