You need to take into account many factors when pricing your product or service. Consider competitor pricing, market trends, business costs, and profit goals. It is important to find a pricing strategy that fits your business. Your first step is to know your costs. Track costs by creating a spreadsheet. Break down all costs as separate lines. This includes any cost of goods sold (or COGS) such as ingredients, raw materials, production fees, and other costs to bring your product or service to market. Include any overhead expenses such as utilities, office expenses, and real estate. 

There are a few standard approaches to pricing:

Cost-Based Pricing:

This approach is also referred to as cost plus pricing or mark up pricing. Prices are based on cost with a fixed percentage markup. This is the simplest and most common approach. With a cost based pricing system all you need to do is break down your expenses and add the fixed percentage to the costs of the goods or services provided. The drawback of this approach is that it doesn't take into account market conditions or competitor pricing.

Simply doubling the cost of a product, or keystone pricing, is an easy pricing strategy. It is straightforward and allows for a healthy profit margin. However, this does not always take into account market trends or conditions. Depending on the product or service you may end up with a price that is too high or too low.

Here is a simple  formula for retail markup that allows you to set your profit margin:
--Retail price = [cost of item ÷ (100 - markup percentage)] x 100

Using that formula, if you wanted your product or service that has a cost of $25 to have a 40% markup you would subtract 40 from 100 to get 60. Divide your COGS, or $25, by 60 and the result is 0.416667. Multiply that by 100 resulting in $41.67. From that you can establish your retail price by rounding up or down to $42, $41, or even $41.95. Here’s what that looks like in the formula:
--Retail price = [25 ÷ (100 - 40)] x 100
--Retail price = [25 ÷60] x 100 = $42

Market-Based Pricing:

Market-based pricing is also referred to as competition-based pricing. It is based solely on what your competitor’s prices are. This approach is usually driven by the market value of a product or service. The downside to this approach is you’re allowing your competition to set the prices and make up the rules of the market. It doesn’t allow you to capitalize on your unique selling proposition.

Value-Based Pricing:

This is a great approach to pricing when you are bringing a new service or product to market. It is based on the customer’s perceived value. However, in a real world market with alternative options it might change what the customer is actually willing to pay. The knowledge of what the customer will pay will set a benchmark for your price point moving forward.

Play around with the numbers, see what strategy is the best for your business. It might be a combination of approaches. Remember, your pricing isn’t set in stone just because it’s the price that you launch with. You can revisit and remix the various pricing approaches. Decide what works best for your brand, customer base, and profit margin. Do you have a business topic that you would like to know more about? CLICK HERE to submit your ideas and sign up for our Big Bad Business Newsletter.