In Part One of this topic on Product Pricing Analysis, we talked about Pricing Analysis based on cost.
Now, we are going to pursue Market Pricing Analysis and how you reconcile both analyses to come up with your pricing.
‘Market’ Pricing Analysis
Now, we are going to compare our “cost-plus” analysis, to what the market will bear, through a competitive analysis. The price of products like yours, of approximately the same size and similar quality of packaging and raw materials (or ingredients), should indicate the appropriate market price level.
Go to several stores, especially stores which you think are profitable and carry a large inventory in your niche (e.g. candles, soaps, gourmet foods, jewelry, woodcrafts). What do you believe, objectively, your product would sell for on the average store shelf? Write that figure down. Compare this figure with your Cost-Plus Analysis figure – which was $8.95 in our example.
Reconciling “Cost Plus” with “Market” Pricing Analysis
If your Market analysis indicates that a product like yours would normally sell for $9.95, and your Cost Plus analysis was $8.95, you are home free. This situation gives us three choices:
- You can actually raise the wholesale price from $4.50
to $5 – the level of the competition (while keeping the extra 50 cents in our pocket). - Or you can split the difference, say to maybe a $4.75 wholesale price, which will yield an average retail price of $9.49. That way you are pocketing the additional two bits (25 cents/unit), AND you are competing a bit on price.
- Or you can maintain the ‘Cost Plus” $4.50 wholesale pricing, and gain market share, by competing on price.
However – and this is more often the reality – what if you find the market likes a price around
$7.95 (compared to your calculation of $8.95). So you would need to offer a wholesale price of around $4 (half of $7.95), to stay within the competitive range.
Now you own a challenge. You do, however, “enjoy” several options:
- Stick with the original pricing, and position yourself as a premium brand.
- Stick with the original price, and put up with lower sales.
- Sharpen your pencil, and look for ways to reduce unit costs (to $2.40, which represents 60% of $4). For example, find ways to increase labor productivity, or reduce costs for packaging and/or raw materials.
- Re-design your product, in a way that makes more efficient use of raw materials and/or labor.
- Drop the product idea, and look for something more profitable.
- Give up wholesaling, at least for now (but keep selling at retail shows and fairs).
Sometimes if you just move forward with the lower margin, selling at $4, you find ways to reduce costs over time which you did not foresee after just an intellectual analysis. Don’t count on it. But it does happen.
Regardless, over time, you must reach a sustainable pricing level.
If you want more information, check our my mini eguide: How to Price Your Products
If you are looking for 1-on-1 help with your pricing, check out my Pricing Your Products Coaching Program