Setting the wrong price for a product is one of the common new product launch mistakes. Setting a price for a new product is an important decision for both the business and customers. Your cash flow, profit margin and resources you can invest to develop, market and sell products with after-sales services and warranties depend on the price of your product. This is why it is not easy to set a price for a new product.
This is an important decision but this does not mean that you should stop the new product launch. You need data to set the right price. You will get the most reliable data when you launch and test your product with real customers. Still, you need a starting point. You need to determine a price that will work for you and your customers.
The price affects everything about your product that includes your business finances, the product’s positioning and more. Therefore, you should be prepared to make this decision more than once. The product price you set before a new product launch is not going to be the product price forever.
There is a simple approach for product pricing. Consider all the costs you have to incur to bring the product to the market and offer after-sale services. Add your profit margin. Use this strategy to set the first price.
Make sure that your product makes a sustainable profit to run your business. You cannot grow and scale with a product that is priced at an unsustainable profit. Once you have set a base price before a new product launch, consider other important factors such as your competitors, your customers’ expectations and how the pricing strategy affects your business.
You can take the following three steps to determine a sustainable price for your product:
- Calculate total variable cost per product
- Add profit margin
- Add fixed costs
Calculate total variable costs per product
Calculate all the costs you have to incur to take each product to the customer. You need raw materials to create a product. Figure out the number of new products you create using a specific quantity of raw materials. The next important resource you invest in is time. Set hourly rates and calculate the number of hours spent to create a product.
Add profit margin
Now you have variable costs per product. Add your profit margin to the product price you have decided so for. It can be a profile margin of 20%. You need to consider two things to determine your profit margin percentage. First of all, you have considered variable costs so far. You have to consider fixed costs as well. The price of the product also depends on the overall market. The price should be within the acceptable range. Selling products can become a huge challenge if you are charging way more than your competitor.
Add fixed costs
The cost a company cannot avoid is called a fixed cost. Fixed costs include salary, rent, taxes, insurance premiums etc. Consider these costs as well when you are setting a price for your product.