You’ve got your business idea and know it will work. You’ve created a prototype of the product, and it’s even better than you’d hoped it could be. You’ve written out your business plan and created a marketing strategy. There’s just one problem: how much are you going to ask for your product or service?
There is no easy way to answer that question, but we have some advice to at least get you started. This is an important part of launching your enterprise and it’s not to be taken lightly. As always, we’re here to help break down the steps so you can get started realizing your dreams.
Calculate Your Costs
First things first: how much does making your product cost you?
- The cost of materials per item if you are making a product; the cost of your supplies and tools if you are providing a service
- Labor costs – what your time is worth, as well as the pay you owe your employees
- Overhead or miscellaneous costs such as website hosting, advertising, promotion, etc.
The trickiest aspect of this calculation is labor. What is your time worth? To figure this out, start by documenting each stage of the process involved in creating your product or providing your service. Remember to include transportation time! As a young entrepreneur just starting out with limited experience, you don’t want to aim so high that no one wants to hire you; however, you also don’t want to devalue your own time or expertise by going too low.
The total cost of the three items listed above is the absolute minimum you need to charge to keep your business running. Anything less than this total cost will leave you in debt.
Let’s say you are selling widgets on Etsy. You’ve calculated the materials cost at $5 per widget. To make each widget takes you an hour per item, so let’s say that’s another $10 for that hour of your time and effort. Combined with the cost of your other overheads, that’s another $10. Your bare minimum per widget is $25 just to stay in business.
How do you make a profit?
There are two ways to come up with how much more to charge beyond the $25. You can choose a flat dollar amount per widget—say $5. That’s not a ton of profit, but it will help keep the costs down for your customers. You can also go by percentage of revenue, or profit margin. This second technique might be easier once you start selling and have a better idea of how much money you are bringing in, which brings us to the next point…
Know Your Audience
Most adults have more disposable income than your fellow high school students. Doctors usually have more money to spend than public school teachers. Keep economic factors like these in mind when considering your price point. Where do your customers live? What will they need your widget for?
An easy way to gauge your target audience is to simply ask them how much they would pay for your widget. Pick some people you already know in your target demographic and tell them what you’re making, why you’re making it, and how it will benefit them. Make sure they know that this is purely for market research and not a commitment to buy your product. Then ask them how much they think is a fair price to pay. The more answers you get, the better you’ll be able to average out a price above your production costs.
If you don’t have anyone to ask, that’s fine. Etsy is full of sellers just like you – search out other products comparable to yours and see how much they sell for. Is this seller popular? What are their customers saying? For services instead of goods, check Yelp or freelance sites such as Upwork or Fiverr to get the gist of fair market values.
Check Out the Competition
There’s an old saying that there’s nothing new under the sun. That doesn’t mean you shouldn’t sell your widget, but it does mean you need to check out your competitors and see what they are doing right and doing wrong. Not only will this help you highlight what makes your widget unique (and better), but you’ll get a peek into how they appeal to your own target customers. If your competitors’ prices are above what you think is fair, why is that? If their prices are below average, what are they doing to sell more and make a profit?
Keep an eye on your competition, because you’ll also need to…
Adjust Your Pricing as Needed
Entrepreneur magazine suggests regularly reviewing your price points for possible adjustment to stay competitive while maximizing your profits. This means not only staying on top of your competition, but also keeping track of your cost of production, the supply-demand economy of your product, and many other factors you can’t possibly foresee when you launch your business (say, a sudden global lockdown).
You’re a new young entrepreneur; no one expects you to get it right from the start. This is why it’s important to check in with your price points from time to time. Successful businesses are the ones that are flexible with their prices as needed.
The Lowest Price Isn’t Always the Best Price
Yes, you want to draw in customers by undercutting the competition. However, going too far may subtly tell customers that you don’t truly value your product, and if you don’t value it, why should they? If others in your field are selling similar widgets for a lot more than what you’re asking, then you’re undercutting yourself. There is no shame in wanting to make a profit. Put a value on your product, and make sure your customers know that they are getting the best quality for their money. That way, everyone wins!
Remember, you’ll also be adjusting as necessary, so if your initial price isn’t bringing in the business you think you deserve, you can always go higher or lower.
There’s No Set Formula for Pricing, Except When There Is
You can easily fall down a rabbit hole of looking for an exact formula for coming up with a price point; something where you simply plug in the cost of production plus your desired profit.
Save yourself time, effort, and sanity, and check out this article, which not only breaks down the types of pricing strategies in a way you can understand but includes a helpful flow chart to get you on track.
Pricing your product can feel like one of the hardest parts of launching your small business, but it’s vital to at least try to figure out a fair price before you start selling. Take into consideration the rest of your business model, see what else is out there, and trust your instincts.
Young entrepreneurs who attend high school in Florida may be eligible for a Kantner Foundation college scholarship. Click here to learn about what we offer and how to apply.