How to Choose the Right Price for Your Product
The golden price ratio for maximizing sales and profits
The golden price ratio for maximizing sales and profits
Setting a price is one of the hardest things in business.
Too low and you won’t make enough profit. Too high and you won’t attract enough buyers.
Price and volume of sales are inextricably correlated.
As the price goes up, it excludes the number of potential buyers who can afford to buy such an item, thus reducing its potential return.
As the price goes down, profits seep away and it starts to make the effort of selling less and less worth the work.
So is there a right answer? Should you sell cheap products to lots of people or expensive products to the few?
Less Is More
We’ve all heard that less is more, but in pricing terms, less means more.
When you choose to sell $3 ebooks, you'll need to sell 11,000 of them to make the average US salary.
Your profit may be high on this digital product, but your need to get a massive volume of customers is also high. 11,000 orders is a lot.
When choosing to sell a product of any kind, this should be at the forefront of your mind. Even if you succeed, will it be worth it?
Let that sink in. You have a business idea, but if the result is the same gross income you’d earn while working at McDonald's for a year, is the juice worth the squeeze?
High and Dry
Expensive products are a desirable business model.
I’ve heard salesmen say, “The price is not what it should cost, it’s the maximum that customers are willing to pay.”
New businesses are sometimes told to do market research on the highest price someone would pay for their product, then price the product slightly under that.
Why is this attractive?
Selling high-cost goods, you need fewer customers, but you also need exclusive, high-quality, expensive branding.
That, unfortunately, creates its own problems. The higher the price, the more customers expect — and the more time it takes for them to part with their money.
Houses aren’t bought on impulse, neither are cars. In most cases, it takes weeks to close a sale or to finalize the paperwork.
Selling four houses a year may give you the same salary (in profit) as 11,000 ebooks, so it seems easier, but customer acquisition costs are sky-high and the workload may be the same or more.
The brands that succeed under this expensive pricing structure are fashion and lifestyle brands. High-priced, low-cost items that promote luxury, but are easy enough to mass-produce and sell to impulsive customers. Think Gucci, Rolex, and Dior.
Is this similar to the positioning you’re looking at for your product?
The Golden Price Ratio Is 4:1
What if your brand doesn’t exist on the fringes? What if you’re going after a broad market, not too cheap and not too expensive?
In this instance, the retail price should be four times the manufacturing cost. If the product costs $25 to make, you should sell it for $100.
This allows for deductions in marketing, customer acquisition, business overheads, damages, lost items, refunds, salaries, and wholesale discounts.
A pricing structure of one part cost and three parts profit is the perfect recipe for not undervaluing products, but not alienating customers and their limited budgets.
This kind of profit margin will also ensure that you can pay yourself a decent wage.
The biggest killer of businesses is not factoring in costs and enough profit to cover those costs. Owners often work for free because of their razor-thin profit margins and lose passion for their venture. Or they have the products but not enough profit in each sale to do more marketing — and lose momentum.
By following this golden price ratio, you’ll be collecting the right amount of profit for the value that you’re giving buyers.