HE-36
Beginning Business
Cooperative Extension Service, Purdue University, West Lafayette, IN 47907
PRICING YOUR PRODUCT
by Lois M. Gotwals, Extension Specialist Consumer Sciences and Retailing
You must price items high enough to cover costs and earn yourself a reasonable return and low enough so that customers will buy your product—if you want to stay in business.
First consider your objectives for pricing. Are you interested in making a living wage or in making a little extra money? Set a dollar goal for the next 6 months, for the next year, and for the next 5 years. This goal should be the amount of wages and profit you expect to make after the expenses are paid.
If you are switching from an amateur to a business status, you will need to develop a businesslike attitude. Amateurs or hobbists are likely to place a low value on their time. A business attitude means that every hour spent on business related activities must be accounted for and given a dollar value. This includes all of the time you spent perfecting your product so that it was salable, plus time spent selling, keeping records, packing, delivering, and traveling to shows. If you really want to stay in business for a long period of time and to feel good about your business, you need to put more emphasis on making a profit and less on having all the business you can handle.
Factors to Consider When Pricing
Before you begin to price a product, consider who is your competition. If possible, list each of them by name and list their prices. If you are making low cost items that can be easily mass produced, your competition may be large businesses and corporations; however, if your product is different or distinctive, your competition includes other business people who make special products. For example, if you are making wedding cakes, your competition might include small bakeries but not grocery stores that handle wedding cakes. When listing competition, consider the use of your product because other items with similar uses may compete with yours. For example, if you make decorative pottery suitable for the top of a coffee table, it may compete with decorative items such as floral arrangements and wooden sculptures.
The quality of your product will be another factor affecting its price. For customers to pay more for your products than for those of less quality, they must value the qualities that make your products special. They must be able to see or feel the extra care you have taken—the beautiful coordination of fabric, extra sanding, the unique shape, the special seasonings, the extra layers of finish—or you must convince them of your quality with labels and advertising. Do not expect customers to be familiar with your quality, but take time to teach them about your products and show the pride you have in your work.
If you are producing quality products which are distinctive, your customers are not those looking for the usual, mass-produced items. They are looking for items which have class and quality, and they will buy because your products are different. They may consider price and compare your work with similar products, but generally they will pay for quality over price. This also means that you must sell your products in shops and areas frequented by these customers, and you must advertise in the brochures and newspapers they read.
Your reputation will be another factor in determining prices for your products. People will expect to pay more for your products if you are well known, have won a number of awards, have sold articles to famous people, have articles for sale in exclusive shops or places, or have limited editions which may be perceived as collectors’ items, than when your are just beginning.
Your expenses are another factor to consider when pricing. Consider both your fixed and variable costs. Your fixed costs are those that occur whether you are producing products or not—rent, utilities, interest on loans for capital equipment, etc. Your variable costs are those related to the items you produce—materials, labor, delivery charges, advertising, and promotional costs. If you are producing items at home, you may want to set a reasonable amount for rent and utilities even if you do not deduct them from your taxes because this will help cushion the cost of moving to a larger place or remodeling. As a business person you will