Even though it would be absurd to claim that the price of the product is all there is to its success of a business, it is definitely one of the most important factors determining how well it fares on the market. The greatest customer service, most brilliant marketing effort and even the optimal business model won’t be enough for success if your product is considerably more expensive than that offered by your competitors. Furthermore, there are some costs your company simply cannot endure if it intends to stay profitable. Nevertheless, you cannot just arbitrarily raise or lower your price. Namely, there are some factors that determine just how high or low you can go and here are six of them.
1. The cost of making the product
The first scenario is the one in which you are actually making the product and it is the one that is probably the simplest one to calculate. Namely, you can start by calculating the direct amount of materials you are required to purchase in order to make the product in question. Keep in mind, however, that this includes a margin of error that will cause a certain amount of material to be wasted. In other words, the number of materials required is not a 100 percent accurate calculation.
Next, you need to keep in mind that making this product also requires a fair amount of direct labor which you might be able to calculate with more or less accuracy. Here, you need to calculate the number of employees you would have to hire for your production team, set their hourly wage and then multiply this by the number of hours they are supposed to work on this product. Pay a special attention to the overtime pay, which usually gets multiplied by 1.5 (although this depends on the region).
2. The cost of purchasing the product
In a situation where you are not actually making the product but buying it from the third party, things are a bit more expensive but a lot easier to calculate. All you need to know here is how much you are paying per unit. Anything more you manage to charge to your clients should be counted as a profit. Of course, if you have a sales team you need to count in their wages, commissions or bonuses into the mix, while if you are selling these items via a digital platform, you might want to consider its maintenance as an overhead.
In a situation where you are importing the product from abroad, there are a few more issues to take into consideration. For instance, you need to think about the transport and insurance costs, both of which can be significantly lowered by finding the most effective freight solutions. Next, you also need to pay attention to things such as storage, customs duties and levies, storage and of course the finance charges. Only after you know the full cost of all these factors can you make a definitive estimate of the final price of your product.
3. The competition
The overall competition tends to be another factor that determines a product price. If you are the sole distributor of the product in the entire region, you can dictate the price as you see fit. On the other hand, if there is already an oversaturated industry, the prices tend to be much more competitive. Another thing you need to keep in mind is that being first to reach the market with a certain product gives you the privilege to adjust the price as you see fit. Still, pushing your price too high means that you will be faced with a massive abandonment rate once others pick up on your trail.
4. Purchasing power
Another thing you need to keep in mind is the fact that the local purchasing power often tends to be the key determiner in setting the local price of the product. For instance, countries such as Switzerland or Norway have a much higher standard and a much higher average salary than places such as India or Ukraine. One of the best, yet quite unorthodox ways to do a survey on the local purchasing power is to check out the so-called Big Mac Index. Seeing how McDonald’s has restaurants all over the globe, with a fairly standardized quality of service, it would be safe to assume their price balancing to be quite accurate. In fact, some even go as far to refer to this index as the interactive currency-comparison tool.
5. Order size
The next thing that may affect the price is the overall order size and a lot of businesses give a discount for large quantities of products. Still, this goes both ways and if you have your own supplier or are ordering products from abroad, you might demand the same treatment. On the other hand, for particularly cheap items, there might be a minimum quantity in order to qualify for some of these benefits.
6. Brand image
In the end, everyone knows that building a brand takes a huge amount of time and resources. This is exactly why a strong brand image may serve as a justification for a boost in your prices. Even with a slight difference in prices, people are usually more comfortable buying from brands they are familiar with. Still, seeing how building a brand may already cost you a small fortune, this can be seen more as a compensation for your effort than like generating more profit.
As you can see, determining a price of the product in question is not a simple thing. So, in order to see just how high or how low you can go with your prices you need to do an extensive research on all of these factors. Moreover, this is best done before you even start with the retail of a product in question, seeing how it will answer you the question of whether you can afford to be in this line of work in the first place.
Finally, keep in mind that these above-listed six factors are not all there is to determine the price of your product. Sometimes, you will also have to consider things such as government regulations and attitude of the general public to the product in question. Still, considering the above-listed five will give you a general idea of the cost-effectiveness of retailing this particular product.