How to Price a Product

Author: Kody Wirth

Kody Wirth

Kody Wirth

3 min. read

Updated May 10, 2024

Setting a product price requires research, a little math, and a willingness to test with customers. 

This article will provide the basic knowledge needed to price your products.

What is product pricing?

Product pricing is the process of determining the amount customers will pay for a product. It’s a balance of covering costs, ensuring profitability, and aligning with market expectations.

Terms to know

You’ll want to know these business terms to get the most out of this article.

  • Cost of Goods Sold (COGS): The total cost of producing your product, including materials and labor.
  • Operating expenses: The day-to-day costs a business incurs to run its operations, excluding the direct production costs.
  • Fixed costs: Costs that remain constant regardless of the volume of goods produced or sold, such as rent or salaries.
  • Variable costs: Costs that change proportionately to the volume of goods produced or sold, like raw materials or production labor.
  • Profit margin: The percentage of total sales revenue that results in profit after deducting all expenses.

4 steps to set a product price

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1. Evaluate your costs

How much does it cost to make your product? This is your cost of goods sold (COGS) and includes:

  • Materials: Raw components of production or items acquired and repackaged.
  • Labor costs: Salaries and wages directly associated with production.

Additional costs to consider

When setting prices you should also account for your operating expenses. These are the fixed costs you pay no matter how many products you produce. This may include:

  • Insurance
  • Equipment leases or rentals
  • Marketing and advertising
  • Utilities
  • Salaries

Note: COGS and operating expenses are tracked separately in your income statement. 

2. What is your desired profit margin?

Consider how much profit you hope to make to arrive at a starting price. This is a percentage you add on top of the production costs.

When choosing a percentage, you’ll want to consider:

  • External factors: Competitor prices, customer perception, taxes, tariffs, and seasonal fluctuations.
  • Market conditions: As a new business you may need to operate at a lower margin to gain traction.

Once you have a percentage convert it to a decimal and apply it to the following calculation:

Price = Variable cost per product / (1 – profit margin)

Don’t forget your fixed costs

You’ll notice that this calculation did not consider your earlier fixed costs. To bring this into your pricing exploration, consider how much you’ll need to sell to break even. 

Use the price you found after applying your desired profit margin and the following formula to find your break-even point.

Units sold = Fixed costs / (Price per unit – Variable costs per unit)

3. Consider your customers and competitors

With your calculations out of the way, you need to see how the price compares to competitive items in the market. 

You need to take into account what your:

  • Competitors are charging
  • Pricing strategy is
  • Customers are willing to pay
  • Unique selling points are

Depending on these factors, you may need to adjust your price point. Use the previous calculation to understand how pricing changes impact your break-even point and profitability.

4. Test your price

Don’t get hung up on finding the perfect price point. Instead, arrive at a few options and test them with your customers. 

You may find that you can sell at a higher price than expected with the right pricing strategy. But you’d never know without testing it with potential customers. If the price doesn’t stick, review any feedback, adjust your price, and try again.

More on pricing products and services

Need additional guidance to set your prices? Check out our other pricing resources:

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Content Author: Kody Wirth

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.