How should you decide what to price your product in the market? After creating, developing and marketing over 250 successful products in the last two decades, we have discovered that product pricing relies on completing a correct order of steps for optimal results, something that you can not afford to mess up if you are a serious business owner. There are so many hard facts to account for when preparing an effective cost and profitability analysis that goes well beyond the assigned cost of goods quoted by a manufacturer– details like taxes & duties, logistics, packaging, carrying costs, and many more must be considered and factored in to make sure that you increase and preserve as much profit margin as you can once you launch your product. We will help you figure out the best way to go about pricing your product for maximum profit.
Listen to the podcast here
This is Price It. That is going to be probably the most controversial thing. You’re thinking, “Why the heck do I need to price something before I even made it? I haven’t even a prototype. I haven’t done any of these things yet. How do I decide that I’m going to have to price it first?” This is a part of those right things in the right order with the right resources. This is one of those right order things. After doing over 250 products in the last eight years, we discovered if we set a target price early on for something, we are much more likely to be successful both in finding the right source to make it and in putting in the right features that will sell to the market. We’re going to look at this with two different viewpoints.The first viewpoint is market basis pricing. We consider this most critical to e-Commerce and Amazon sellers. Retail buyers care about this. This is not for those who are doing real premium products, high‑end products, or business-to-business products because you have a bit more opportunity to command a higher price if necessary, especially if it’s something cutting edge and inventive that no one’s ever seen before. If you plan to sell this at retail in any way, shape or form, online or in store, then market basis pricing needs to be your guide. Market basis pricing is understanding what the market will pay for something, what is competitive in the marketplace, and then working backwards through margin and carrying costs and all of the different costs that you need to associate to get to your cost of goods sold, so the amount you need to manufacture a product for.
We’re working backwards in some cases. We call it target retail. You want to set it at the suggested retail price, but you also want to be thinking about it at. “What am I going to sell this for everyday?” A lot of times on Amazon and other places, you’ll see a retail price that says something like $19.99, but it’s crossed out and it sold for $11.99, and whatever that price is that it’s crossed out for and the $11.99 in this particular case, that needs to be your target retail price because most often that means that the promotional price at which you need to be profitable needs to be your guide. We use a promotional price and we back down a percentage we expect to make, so that’s how we develop our margins and our costs of goods. We like to start from there as our target retail in the planning process, knowing that we also expect to hit $19.99 and therefore making more percentage higher profit margin at that time. That’s how we do it.
Some of the ways that we determine market basis pricing is a competitive study. We go out there and survey the market of the closest products that might be relevant, products that are close in feature that somebody might buy them instead of yours. I know some of you think you have the most inventive thing out there that no one’s ever seen before and there is no competition, but I want to remind you again that no competition is a bad thing. Having competition is good because it allows you to set a comparative price, a comparative value for yourself, and in that you can maybe command 10% or 20% more. For this exercise, for this first part of determining whether or not we can make it competitive, we want to determine what is out there in the market in your particular category, in your particular type of product, and come up with the closest things that are out there and benchmark against those prices.
The other thing we do is we can go back to our prove-it step and go through qualitative and quantitative market research. In other words, let’s qualify that price. If we’ve come up and say the market can bear a $30 item, but we think we have higher valued features, then what we do is we put their product and our product side-by-side and we ask people to assess which one is higher priced and by what percentage. That way you can determine is there a perceived value of 10% or more. If it’s within 10%, you want to try to compare it and get the prices as even as possible in your initial target. If it’s over 10%, if you get 20% or more in perceived value, then you can go ahead and raise that initial target price. We always do this because we want to have an understanding that it’s not what we think it should be charged for. It’s what the market thinks it should be charged for.
It’s the exact niche market, the particular type of customer or the particular type of buyer you expect to sell it to, so if it’s mothers of preschoolers or if it’s dads who are coaching soccer, it’s any of those things, those are the people that you want to survey. You want to get a very detailed opinion about what they believe something is worth. Then we can always set that price higher and discount down, but you have to be prepared at what that price is. If they say it’s equal to the competitive product, we want to set our price there from the planning process, which is what we’re in here. We’re pricing it and we’re planning it, so we want to see if we can get it to cost out here, we want to see if we can manufacture it here, and from that stage we’re going forward into all the planning process and all the costing process and all the profitability studies on this. It’s not a judge of whether or not you can try it at a higher price in the market and back down. You can do that later once the product is issued and great once it’s made and you can command a higher price and you’ve proven that through conversions of sales, then great, you’ve got a higher margin. We want to start with what is the most likely to be the case here.
Another area I want to talk about is going from the opposite direction. Let’s say you do have something that is so unusual that’s never been made before. This happens a lot in medical devices and other places like that where you have to start from the cost of goods. How much does something cost to make it? This is the part that I find that most people miss out on. They don’t understand all of what the cost of goods are. They think, “I’ve got a quote from a factory and they said it was going to cost me $10 to make it.” That’s only one small factor in the scope of things. You also need to include taxes and duties, especially if you’re importing. They need to be specific to your product category, so you have to understand that and know that. If you’re going into a retailer such as Target, Walmart, Best Buy, or any of those places, there are what they call program costs. These are your contribution to ads, your contribution to their discounting. Sometimes retailers even make you contribute to the discount that they will charge, so you would have to pay a kick-in for that as well. There are also logistics, shipping it to the warehouses, distributing it out to the warehouses, getting it to port. You have logistics on both sides, overland and shipping, so you have both things going on. If it’s so brand new that you have to create it from new, there might be tooling and/or new part, extra materials you have to buy, all of that needs to be amortized in your first couple of runs or your first-year volume depending on your profitability matrix.
Don’t discount the cost of packaging. This happens too often that in the early days and we think, “We’ll accept whatever the packaging cost on the quote is from the supplier.” You’ve forgotten that you want beautiful, nice quality branded packaging. You have to think about the design of that as well. I usually double packaging costs to be on the safe side for all the things you might need to add later, like inserts and special instruction sheets and things like that.[Tweet “You want to keep that suggested retail price where you need it to be for an ideal margin long-term.”]
The other big thing that happens that you don’t realize as you try to go into retail is that cube matters. The size of your box matters. If the size of your box isn’t perfectly cubing out, if I can’t fit a specific maximum number of items in a container load, in a truckload, you’re leaving money on the table. Anytime that you can adjust that cube so it matches perfectly to a 20‑foot container or a 40‑foot container, or will it be the same thing when you consider a truckload, a pallet, you consider the cube, it matters and it can drastically affect, especially at certain retailers, especially at a club retailer like Sam’s Club or Costco, that can matter and be even more significant on the cost of goods than any other factor, so consider that ahead of time. This especially goes for any product that is large like pieces of furniture. The larger the product is, the more this cube matters and is a critical factor.
One more thing about that plan of looking at that big holistic package of the cube, the packaging, the logistics, tax and duty, the retailer program costs, your amortization of things and the cost of goods is you also have to look at, “What is my long-term goal?” If I’m selling into a channel like a retailer like Best Buy or Office Depot or Target, I have to think about that future growth plan and make sure that I’m preserving enough margin on there. If I don’t have preserved enough margin now and it’s perfectly fine and I’m making money on eCommerce and making money on Amazon and it feels great, I’m making 15% to 20% and I’m happy with that because it’s good money every month, but if I want to scale up and get onto the shelf leader, I haven’t left myself enough room and there isn’t any way for you to raise the retail price at that point. The retailer is never going to accept that, so you want to preserve that from the beginning. It’s okay to offer discounts down. Remember we’re going back to that suggested retail price. You want to keep that suggested retail price where you need it to be for an ideal margin long-term. Wherever you are going to eventually, your ideal place to sell it, it could be HSN, TVC, or the mass market retailer or a club model, whatever that is, you want to preserve that margin and you want to give yourself as much profitability and profit margin as possible with the understanding that you’re not buying in that larger volume, so you have volume discounts.
What I always do is I go to the supplier and I ask them to give me the minimum order quantity pricing, so what is the smallest amount of units I can buy and what will that price be and then tell me what it would be if I scaled it up to hundreds of thousands of units, so you want to see the extreme difference in that price and assign a percentage difference to it. If the cost drops when it hits 100,000 units down 50%, your costs go down, then you plan for that cost of goods and making sure that you would then have that cost of goods plus all of those carrying costs, all of those other costs of packaging, tooling, logistics, tax and duty, all of those things would yield you 70% profit margin. I want you to at least have a 70% profit margin. It seems extreme and that seems a whole lot, but if you were to buy in volume, that’s giving you the most opportunity to move, it’s giving you the most flexibility, and when you’re buying it at a lower quantity and you’re ending up with only 40%, it’s still better than you were probably out before.
This gives you the absolute plan of your end goal and getting all of this margin preservation in there. The other thing is it makes you more acquirable. If your goal is to be an acquired brand, then what you’ve got is ability for them to see high ratios of profitability and also the possibility of if they buy you and then buy at higher volume because they have more capital, they will be more successful, they can improve and make money immediately. One of the things that can make you a big brand fast is if you have that margin preservation in there and you plan it well.
The one last thing I want to mention is something called carrying costs. This is the cost of carrying inventory for a long period of time. For some products, there’s an expiration date. If you’re making a food product or a nutraceutical or a skincare product, there might be expiration dates on those products. Whenever you have an expiration date, you have to narrow it in and think about the fact that you’re going to have to sell those units out. I see too many people unwilling to discount and/or close out and/or get rid of it because they’re worried that they’re going to devalue their brand. The reality is that getting product moving is also a very good sign of a good big brand. It’s one of those factors we call number of turns, inventory turns. You want to get your inventory turns happening in any way, shape or form, and if that means discounting program, distributions, marketing plans, whatever it might be to keep it moving on a monthly and/or quarterly basis to keep those turns up at a certain level, you need to do that because these carrying costs are extremely high for a future retailer, for anyone looking to acquire you.
If they see slow amounts of turns, then it’s a factor in devaluing your overall brand as a whole. High carrying costs have a long-term effect that is very negative on a business and so we want to keep those carrying costs low, keep the turns high, and the amount of inventory low within reason obviously. You want to make sure you don’t run out of product in the process, but we have to consider that as a factor. We look at turns and we assign a dollar amount of, “How much is it costing me if I were warehousing this now?” For the most part, many of you are putting it on Amazon and there aren’t official warehouse costs associated with it, but you want to make sure that you assign a number to that in terms of profitability. If something’s not turning and it’s sitting there, if it were in your own warehouse, what would it cost? If it were in a third-party warehouse, find out the costs of what it would cost per day, per pallet, per piece, and assign that dollar value to something so that you can look at the overall profitability.
We want to get to what is a good profit margin for your product and you want to know this at the beginning. We want to know what is the market price target? What is that cost of goods target that’s ideal for us? What are all of those extra costs that are going to happen to us? All those carrying costs and program costs and taxes and duties and logistics, all of those things, and we want to make sure that we’re understanding that, so our profit margin is very clear to us and it’s not hidden. That way, we plan and we design for that. Sometimes it means that we can design better to get you a smaller packaging because if you had a slightly smaller package, you might be able to have much lower logistics costs, which can sometimes be up to 30% of your total costs. These are things that we’re going to push into features and/or requirements criteria of which we’re going to design and prototype against. They’re critical and important for us to put this in our step two, price it.
The other thing I want to make sure that you all realize is that you all have access to our membership group as a part of this course. Make sure to go there because we have some pricing calculators that go both directions. They don’t have all the very specific features of your product category, but they give you a good general idea. We do try to set them for a certain box sizes and other things, so if you do know the size of your product, you can put those in, so they’re not too generalized for you and try out the calculator and play with it and see which way works best, like, “If I had this cost of goods, can I fit the market? If I have this market price, what do I need to go find a factory to make it for?” It can help you understand the two directions that make pricing viable for a profitable product business.