Startup Sunday
Last month, I wrote about how small business owners set prices for services they provide. Now, I'm going to tackle how to set prices for products that your business makes. The cost of your entrepreneurial product is one of the most critical factors in the success of your business, so take your time setting prices.
Research the Market
The first step to set prices for your entrepreneurial product is to research your competitors and customers. Look at prices for comparable items, whether they are made by small businesses or major corporations.
Be brutally realistic about whether your product is higher or lower quality than your competitors, and adjust your numbers accordingly. If Fisher-Price is selling a dollhouse for $30 and you feel your hand-made version is higher quality, survey potential customers about how much more they'd be willing to pay. $5? $10? $2? In these tight-fisted times, people are counting pennies and may not be eager to pay more for an unknown brand -- even if it appears to be higher quality.
Look at Your Costs
Next, calculate the cost of producing your product. Add up the cost of materials you need, any workers you must pay, estimated marketing expenses and don't forget your valuable time. Even if you're making hair bows or jewelry in the evenings after your children are in bed, that is time you could be using for other important purposes -- cleaning the house, relaxing or exercising, organizing your finances or bonding with your spouse. And then there is the substantial time you'll need to spend marketing, networking and selling the product.
You may have two or three different levels of costs: the cost of an initial run of prototypes, the cost once you are fully in production and perhaps the cost if you are highly successful and can expand to take advantage of economies of scale.
Again, be brutally honest with yourself about how long you can stay in business in the first and second scenarios. If you are counting on selling enough items to afford bulk materials and outsourced labor, what happens if your sales are slower than expected? Will you run out of energy or money before you can break even?
Think About Samples and Discounts
Another important factor to consider is the need for your start-up business to produce sample products for reviewers to test and for stores to examine. If you're making a very expensive, hand-crafted high chair, you will need at least a half-dozen samples to share with stores that might sell the chair or reviewers who want to test it.
These sample units are bound to return from being tested with a few dings and scratches, making them unusable for full-price sales. And during the time that they're in stores as display items, you'll be unable to move them out of inventory.
When you price your product, you also should leave room for discounts and the promotions you'll need to run to attract customers. If everything must be sold at full price in order to earn a profit, you've got a losing business model.
After going through this exercise, if you find your product is priced too high to make a profit, don't go back and revise your numbers to make it work. Instead, consider the possibility that you may not have a financially successful product. Sure, the world might benefit from your producing it, but if you can't make enough money to stay in business, it's not a viable plan.
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