How to Price Your Products & Services
Method 1
There are a number of strategies that you can use to set your product pricing. One way to set your product pricing is to use your productions costs and then add some margin.
Using this method, you can end up ignoring the marketplace and the competition. Some think of this as the minimum that they can charge and still make a profit. The counter-argument is that you may be missing out on higher profit margins if customers highly value your product (or service). Alternatively, you can be pricing your product higher than the competition and missing out on potential sales (since demand tends to increase as prices go down).
Some of the limitations of Method 1
May not sell if customers do not perceive as valuable at this price range.
May not sell if priced higher than the competition.
You can sell at a higher price if the product is one of a kind.
You can sell at a higher price if similar products are sold at a lower price by the competition.
Method 2
Another popular method is to find out what the competition is charging then choose to position your business either above the competition by charging more, or below by charging less.
The limitations of this method are the opposite of Method 1 above. You end up focusing only on the marketplace and the competition and ignoring your internal operations.
Some of the limitations of Method 2
May not sell if customers do not perceive as valuable at this price range.
You could be selling at a loss if production costs are higher than the selling price.
Product pricing is one of the most important decisions
Pricing should not be treated as a mathematical equation. Both qualitative and quantitative factors should influence pricing decisions.
This includes perceived value — which is the price that a customer is willing to pay for your product or service. Psychology plays a part. People generally associate higher prices with superior quality. However, if you fail to create value, customers may not stick with your product or service.
A more thoughtful approach considers:
Production costs
Prices of the competition
Brand strength
Supply and demand considerations
Perceived value by customers