How to Price Your Products and Services

We have heard the advice, that you must price your product the cheapest to get traction in the market.  Otherwise customers will choose the cheapest product on the market.  This is often terrible advice.   

How can you tell?  In 2018 Apple sold 65 million iPhones.  That sounds like a massive amount, but that is only ~16% of all the smartphones sold world-wide.  Apple’s profits, however, accounted for 73% of all the profits in the smartphone industry that year.  Apple certainly doesn’t charge the cheapest prices in the market with their most popular phone costing more than $700 and the cheapest phone a competitor sells costs less than $100.  Yet, because they’re offering a quality product at a fair price, their customers buy them in droves, and they make a tidy profit. 

You should charge for your products, what they’re worth as well.  One of the mistakes many new entrepreneurs make is in pricing their products too low, even if they’re not the cheapest in the market.  One of the most effective ways to price your products, especially when you’re starting out, is to consider the cost to make your product and deliver it to the customer, if you must pay someone else to do it. 

New business owners often try to work for free so that they can keep the profits in the business and that works fine at first, but when you need to hire help to build or create your products and services or you need to go from startup to full on company, you’ll find yourself in a bind.  In order to hire help to create those products or for you to be able to take a paycheck you must account for the cost to build and the profit margin. 

We recommend a simple formula.  Take the cost of materials + the cost to pay someone else to build/create it and then add your profit margin.  Let’s look at an example. 

A woodworker is building beautiful farmhouse kitchen and dining room tables.  They use Oak for the Tabletops and Fir for the legs and aprons.  The table takes about 3 full days to build.  The cost of all the materials to build the table is approximately $300.  The 3 full 8-hour days = 24 hours. The average carpenter in the area ears $30/ hour.  In furniture making the average mark-up is 40%.  Let’s plug this into our formula: 

Materials Cost ($300) + Cost to build (24 hours * $30/hr. = $720) = $1020 * 40% mark-up = $1,428. 

$1428 for a table that cost $300 in materials seems like a lot and for many people that would be.  For many other people that would be a bargain.  You can go to a discount furniture store today and buy a dining room table and chairs for $300, but they quality and craftsmanship are worlds apart.  Be sure to understand where your products fit in the industry and charge accordingly.  

How do you price products?  Tell us below.