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- The Price is Right
Pricing your product can be a nightmare. Looking online reveals a plethora of pricing strategies, and it’s impossible to know where to start.
The answer, though, is simple—if your business is new or in the early stages of its life, the safe bet is to turn to cost-based pricing.
Surviving as a business long enough to get your foot in the door is hard. At this stage, your focus should be on giving yourself enough runway for your brand to take off. Other pricing models work well, but they're a better fit for larger companies with deep pockets.
So, how do we calculate cost-based price? Well, there are two main methods:
1. Cost-Plus Pricing
Also known as markup pricing, cost-plus pricing operates on calculating your total costs and then adding a fixed percentage markup to give yourself a profit margin.
EXAMPLE For instance, if your product costs $20 to produce and you want a 40% profit margin, your selling price would be $20 x 1.40, or $28.
2. Break-Even Pricing
Break-even pricing is based on the concept of production volume, or how many units you would need to sell at a selected price in order to hit the break-even point.
If you know your production volume, you can calculate where you need to set your price to recoup your costs.
EXAMPLE Let’s say you’re producing 5,000 units. The variable cost to produce at this scale is $10 per unit. Your fixed costs are $50,000. Using the formula above, your break-even price would be equal to ($50,000/5,000 units) + $10 per unit, for a total of $20 per unit.
Note: When calculating your costs, it’s critical to factor in all aspects of production, distribution, and sales. This includes the price of materials, manufacturing, shipping, and even post-production marketing efforts.
Some final words…
Once your business has moved past its initial stages and is experiencing steady and consistent growth, you can start looking at other, more complicated pricing analyses such as competitive pricing, value-based pricing, and more. But that’s a story for a different day.
Until next time,
The CPG MBA Team