How to set the right prices for your products: A guide for the best pricing strategy for your brand
As you probably can imagine: Pricing is a really important factor when it comes to creating the products you offer. Whether you are a new brand or have been on the market for a while, it is important to have the right pricing policy. This guide will enable you to set the right prices or challenge and adjust your current prices.
Is pricing really that important?
Yes. A price is defined as the value a person or company has to pay to you for a particular number of products or services. A price tag you put on your products is visible to everybody – and if once set wrong, it is not easy to change pricing decisions without confusing your customers. It, therefore, makes sense that your pricing strategy is a crucial part of your business – because it literally defines how much your product is worth and which kind of customer you want to reach.
What is a pricing strategy?
Your pricing strategy includes all decisions regarding the price your customers need to pay. The following list summarizes the decisions that go along with pricing:
- How much does your product cost in general?
- Shall your product cost the same for every customer, or do you want to differentiate (e.g. based on the location, selling potential)?
- Is there a discount you would like to offer to some customers?
- Is the price supposed to be changing over time (e.g. after you reached a certain visibility on the market)?
- How do you wish to impose your price on the market?
Since the price sets a value to your product, it of course makes sense that it also sets a value that your product needs to compare itself to.
How do I define my prices?
There are three different ways to define your price:
- demand-oriented pricing: the price depends on the value your potential clients would be willing to pay
- cost-oriented pricing: the price depends on your cost structure
- competition-oriented pricing: your price depends on the market price of your competitors
Which pricing strategy might be the best depends on your product and the general situation. However, it usually makes sense to keep all three aspects in mind, when you define your price. The perfect price for a product does therefore cover your costs and even adds a profit margin, but also is reasonable in comparison to your competitors and for your target audience.
What’s the right pricing strategy for a newcomer brand?
Especially in the beginning, we recommend you to work with a cost-oriented approach to make sure that your costs are covered and you can make a profit out of your activities. Therefore, a good starting point is to list all of the costs you have when creating your product so that you know the exact unit costs you need to at least cover:
|Material Costs||All the costs that refer to the physical resources you need to produce the product (e.g. wood to create a chair)|
|Production Costs||All the costs that come up to produce your product (including wages, but also overhead costs for electricity, warehousing, etc.)|
|Service Costs||All the costs that come up to provide your product to customers (e.g. consultation, but also delivery through a third party)|
|Administrative Costs||All the costs that come up generally in your business (e.g. your book-keeping and tax advisory)|
After creating the list, you can easily define how much one product unit costs you in general. This price is the one you want to be at least covered. However, of course the end goal shall not be to break even but rather to also make a profit out of your products. Therefore, it is important that you define a good but reasonable profit margin and add that to your costs. To define the margin, it usually helps to get connected with people in your business sector and do some research on that in the internet – because the margin itself is of course highly dependent on your product.
After calculating the costs and adding the margin, you receive the wholesale purchasing price a potential reseller has to pay to you. However, when doing wholesale your price calculation does not end here.
Also think about your recommended retail price
The recommended retail price is the price you wish shops to sell your products in their store with. Since the store wants to profit from selling your product as well, it is quite important that you also work with a good and reasonable profit margin for the shop here. Also the shop needs to cover costs – and wants to have a profit at the end of the price check. A god margin lies therefore the base for a long-term business relationship between you and the store.
A good profit margin depends on the country. In our home country Germany, it is usually recommended to work with a factor of 2.2 as a reference point. This means that your products do appear interesting to potential resellers if your recommended retail price is at least 2.2 times your wholesale price. With this, the costs of the shop and also the taxes are mostly covered in a reasonable way. It is really important to make sure that your pricing is consistent.
Summary: A good price therefore includes the following points
Great, now you know the basics in pricing! As already said this is one of the fundamentals when it comes to having a sophisticated brand appearance. If you want to know more about your branding we have some interesting articles on our blog, too!
If this was an old hat for you you probably are searching for some resellers for your products. We would love to help you find those. Just book a free demo call and we will be very happy to talk with you about your possibilities or answer your questions!
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