As a business owner, setting prices may be one of the most frustrating but crucial aspects of running your business. Set prices too low and you may not make enough money to stay in business or to grow. Set prices too high and you may scare off customers. 

Finding that “just right” sweet spot is often an ongoing task.

Just when you think you have it right, it will probably change. A competitor will copy your product and slash the price. A key supplier will raise their prices, which impacts yours. Shipping costs will rise, advertising costs will go up, or any number of changes will affect how you set your prices. 

“There’s one easy way to find out what customers think about prices. By selling them things,” writes Tom Whitwell in Magnetic Notes on Medium. He had the not-do-enviable task of helping introduce a paywall to The Times digital edition. Since then, he says, he’s been “slightly obsessed” with pricing. 

Here we’ll discuss common approaches to setting prices for a product-based business. 

How Do Businesses Set Prices?

Before you can price your product you must know how much it costs to produce it. At a minimum, you’ll need to know your COGS or cost of goods sold, or all the costs directly related to the production of your products. (COGS usually includes the cost of supplies/raw materials used to create the product, overhead costs to manufacture the product, packaging, and direct labor.)

Once you know your production costs, you’ll also want to understand: 

1. Type of business/industry: Most businesses have pricing benchmarks that you can use as a starting point for your business. If you have experience in an industry you may already have a good feel for pricing. But if you are new to an industry, you may feel less confident. You may want to survey other businesses, or even invest in a pricing study. Either way, you’ll want to understand how price-sensitive your target market is.

2. Business strategy: Are you trying to build a luxury worldwide brand, a local artisan business, or something in between ? The elements that go into your business strategy (vision statement, objectives, marketing strategy, etc) are going to dictate your pricing. (Think about a business owner who is willing to pay a high annual fee for a premium business credit card that offers perks and rewards. For them, premium pricing is worth it.)

3. Stage of the business: While the stage of the business doesn’t always dictate the pricing strategy, in certain cases it does affect pricing strategies. It’s not uncommon for tech businesses to start off with low-cost or a “freemium” model to gain customers, referrals and traction and then remove these subsidies once they have established themselves in the market. However, that can also create backlash when you eliminate the free options or raise prices. (Just look at what’s happened with many TV streaming services.) 

4. Overall competitive landscape: Oftentimes the competitive space your business is in will also impact the pricing strategy you use. Businesses sometimes refer to Porter’s Generic Competitive Strategies to assess where their business fits in the competitive landscape. With this approach, businesses that are differentiation-based have more flexibility in their pricing strategy, since they are filling a need that was previously not met and there are fewer competitors. By contrast, businesses that are cost-focused often have more competitors and little room for differentiation so they lean heavily into offering the lowest price to attract customers. (Look at Amazon for numerous examples.) 

How Do Businesses Determine the Price of a Product?

While the simplest pricing formula is to set a selling price that covers your costs and provides your desired profit margin, it’s not usually that simple. 

Successful businesses often use sophisticated pricing research to determine and set prices. 

Today, there’s a wealth of data available to help businesses set prices. This data has given rise to dozens of pricing tools that can help businesses set prices: 

• Pricing survey tools
• Price scrapers
• Pricing intelligence tools
• Price recommendation engines
• Repricing and dynamic pricing tools

Some of these tools are geared toward ecommerce or Saas businesses, but many have broader applications. 

If you’re a new business looking to set prices for the first time, you may not have a budget for the more expensive tools. 

But you also don’t want to just guess at the right price, and perhaps make a pricing mistake that affects the viability of your business. That’s why pricing strategies are important. 

How Will You Set the Price of Your Product?

While you don’t want to get caught up in “analysis paralysis”, you do want to take time to think about the pricing strategy for your business. Here are a few resources to help you get started: 

1. Survey other businesses. Take a few days to research competitor pricing to get an idea of what other businesses are charging for similar types of products. Again, you don’t necessarily have to (or want to) offer a low price; think about whether there may be room for high quality, higher-priced products. 
2. Find industry resources. Is there an industry association you can join? You may be surprised at the variety of nice industry associations. (For example, Nav has contributed articles to American Window Cleaner magazine and Snow Business magazine.)  Look for experts in your industry who are talking about pricing strategies.
3. Check out podcasts. A search of Apple podcasts for the term “pricing” turned up an HBR episode titled, “How to Build a Better Pricing Strategy, one titled “Mastering Nail Salon Pricing”, a restaurant strategy episode titled “RETHINK: pricing”, and still another titled “Expanding Your Pricing Paradigm”. There’s even an entire podcast series from the Professional Pricing Society 
4. Get a business mentor. An accountant with experience working with business owners in your industry can help you crunch numbers. You can also request a free business mentor from SCORE or your local Small Business Development Center (SBDC).

What Is a Pricing Strategy?

Setting the price of your product is much easier when you have a firm understanding of your business, business costs, strategy, stage of business, and competitive landscape. But this knowledge just provides an idea of what type of price strategy you are going to pursue, not necessarily a specific pricing structure or strategy.  

Pricing strategies can be beneficial as they help provide greater insights into the pros and cons of your pricing decision along with more information about how you will set the price of your product.

A pricing strategy refers to a strategy that takes into account the different elements of your business and the competitive landscape to come up with a price for your products and/or services. 

There are a number of popular pricing strategies including:

Cost-plus pricing: The cost-plus pricing model is one of the simpler pricing strategies. You simply take the cost of the goods sold and add on the markup you are wanting. Of course the markup needs to be reasonable and based on your business and its needs.

Psychological pricing strategy: The psychological pricing strategy is one in which you use psychological techniques to help sell your products. Common techniques include pricing something so it ends in .99 such as 10.99 rather than 11.00 to make someone feel like they are getting a deal. There are several other strategies you can research to help increase your sales.

Skimming pricing strategy: The price skimming strategy is where a product is initially released at a high price and lowers overtime. With this type of pricing strategy the initial product released must have enough value to command the higher price point, but as time goes on the product will probably lose perceived value because of new competitors or similar products that won’t make the initial product as appealing. Hence the higher price now allows the business to offset lower profits later.

What Are the 4 Types of Pricing Methods?

There are many more than four types of pricing methods/strategies. Here are four additional common ones besides those listed above:

Captive product pricing: This pricing method is similar to a subscription based model. A consumer purchases one product and then needs another product, and they come back to your company to buy it. An example: you buy a razor with disposable heads. You buy the razor and then buy the new razor heads to keep using it. 

Penetration pricing: With this pricing strategy you offer a low initial price to new customers in order to grab market share and boost sales volume. You try to build as large a customer base as possible, in the hopes they will stick with your business when the price increases, or buy additional products or services. 

Value-based pricing: Value-based pricing allows you to charge as much as customers are willing to pay. You need to make sure you are staying on top of customer desires and what direct and indirect values they derive from the product(s).

Competitive pricing: There are different pricing strategies within competitive-based pricing, but essentially what the strategy calls for is to look at your competitors price and make your pricing decisions based on their pricing. Depending on the strategy within competitive based pricing that you choose, you must pay strict attention to your competitors pricing to adjust yours.

What Is Product Pricing?

Typically, product pricing refers to setting the price of your products based on the actual cost of producing your products, along with the value your product provides. 

Oftentimes the minimum price is what it costs to produce the product, while the upper limit is the value the customer receives from the product. 

It can be hard to know what that upper limit is and where you should position your prices within the range. Market research, along with your company specific information, will be the best source for determining where in this range you should price your products.

The Bottom Line

Entrepreneurs who want to build a successful product-based business need to think carefully about creating a competitive pricing strategy that helps their business succeed. Since pricing can make or break a business, take the time to research your market to set prices that work for you and your target customers.