The 8 questions to ask yourself when setting your price
Pricing is the most important - but often overlooked - part of your business is the lifeblood to having a sustainable business that can give you the profit and returns for all your hard work. You should consider pricing one of the key parts of building your overall brand and by asking yourself the eight questions below, it will help in making sure your price aligns with your brand. If you’re buying in products from a third-party then some of these may be easier to answer, and if you’re making it yourself - then a little more digging may be needed.
How much does it cost?
This is more than just the raw materials. Its everything including postage, distribution/ logistics and all the costs to get to your customer or wholesaler.
Make sure you understand the different price breaks for ordering ingredients and packaging. This means understanding how many you need to buy to get the next ‘volume’ discount. If you’re buying small amounts then expect to pay higher prices per unit. Bulk buying has obvious discounts but needs higher cashflow to purchase upfront - and potential for waste if you don’t use it all.
How much will your target customer pay?
First things first - you need to know WHO your target customer group is. You can make this a super-tight customer persona - or a wider group with more general characteristics like ‘parents with young children under 5 who like to shop at discount supermarkets’.
Talk to your target customers about what they consider too cheap and too expensive for a product like yours.
Don’t ask ‘how much would you pay for this product’ as that leads people to guess - and try not to disappoint you… so you might get a guess that doesn’t represent what THEY would actually pay.
What are your competitors prices?
Your customers are likely to have products that they already buy to solve their need, and its helpful to understand what these ‘alternatives’ are.
Do your target customers use price as a sign of status or quality? Or are they looking at value for money and getting the best deal?
Write out the different competitors shelf and promotional prices, how big their product is (eg grams/ servings per pack), and see how yours would stack up in comparison
If you’re going to be quite different - then think about how you will explain the difference.
What value do you give customers - the problems you solve or benefits you create?
Get clear on WHY your product justifies the price you want to charge - not only relative to competitors, but also for the BENEFIT that the customer will get.
Make sure you focus on the parts of your product that give your products the MOST value, and either remove or downplay the parts that they don’t value.
There’s no point including things in your product that customers don’t want or need.
What’s the retail channel - and relative pricing?
Think about where you want your product to be sold now and in the future. Although you might start out by selling directly on your own brand website, its likely that as you grow you’re going to want to sell through another channel - whether thats another online store, wholesaler, retailer or supermarket.
Remember - the same drink from a supermarket, service station and restaurant all have very different pricing, and this is down to customer expectations and the wider customer experience. When you’re at a supermarket there is a huge selection, generally regular price promotions and you are more likely shopping for an ‘at-home’ consumption. Drinking the same glass of sparkling water at a restaurant there is less competition (you’re likely the only brand on offer) and also a relative expectation that it may come at a cost if its more than regular tap water.
What is your brand positioning - are you trying to be a value brand? super-premium?
A key part of your brand development, is understanding what your brand is going to be all about - and how pricing will reflect your positioning.
If you’re a mass-market family brand that is accessible to all - then your pricing needs to align with this. A $20 bar of soap may be too expensive for everyday family baths & showers, BUT a great option if it has skin health benefits and is a premium purchase or gift.
All parts of your brand positioning need to line up - ingredients, product, packaging AND pricing…
How does your price compare to other substitutes?
There are lots of different ways that people can meet a need - if you’re needing an energy boost you can have anything from an instant coffee, cafe barista coffee, energy drink or a super-pep energy shot. OR it could be a bag of sweets, banana or protein bar. All of these have VERY different prices and you need to think about how your product stacks up in comparison.
This can be helpful when it comes to your marketing activty and explaining the price of your product compared to other alternatives.
A $2 coffee pod sounds expensive compared to an instant coffee made at home - but CHEAP when compared to a cafe made coffee if it has the same organic coffee beans and barista quality.
The final - and I believe most important - question when it comes to pricing is less about external considerations, and more about setting your business up for the best chance of success.
What price do you need to charge to have a viable business?
If your pricing structure results in an unprofitable business model, then what you have is an expensive hobby rather than a business.
Although there are lots of stories about companies that make a loss year after year, the reality is that unless you have DEEP DEEP pockets and a stomach of steel, then profits are the lifeblood for a sustainable business.
Get clear on the first 7 questions, have a clear value chain and understanding of your margin model from end to end - and you should be able to more confidently answer this question.
If you’re feeling stuck on how to answer these questions for your business, check out our DIY pricing model & guide to cost considerations
or book a 1 hour session with me for some 1:1 time to dive into your numbers
