How do you price your products or services? Part 2

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In a previous blog post, I described how to calculate the price of our product, which is derived from the cost of producing that product. We set up a company that designed and sold T-shirts with custom printing. In our calculations, we found that the price of the designed T-shirt consisted of a fixed cost and a variable cost – 20 PLN and 80 PLN, respectively. It turned out that we should sell 100 T-shirts in a month at a price of PLN 100 each. Then we would earn 5,000 PLN for our work on a pure basis. The price of a T-shirt seems quite high, but….

We need to take into account the prices of similar products offered by other companies in the sector, that is, other companies producing T-shirts with author’s printing. How to approach such a market discernment?

First, look for companies that offer the same or very similar product. Don’t compare T-shirts sold in chain stores like Reserved or Carry for $24.99 to your author-printed T-shirts. Of course, they should be considered, but they are products relative to each other that are distant substitutes, not close substitutes. If someone wants an author-printed T-shirt, he won’t buy one at Carry. And vice versa. Therefore, don’t worry if the T-shirts in the chain store are much cheaper than yours. Just look for similar companies to yours offering similar products. There is a certain group of people in a certain area at a certain time – it’s called market potential – who only want to buy custom-printed T-shirts. If there are enough of them, your business will be profitable. However, it won’t be if, driven by the pressure of a lower price at Carry, you lower the prices of your T-shirts. A customer will compare a T-shirt with an original print from your company and from a competitor.

Secondly, once you have a list of several companies that make such T-shirts, try to make a table with different variations of their products at different prices. Look for answers to the questions:

  • what does the price of a T-shirt depend on at competitor companies – color, complexity of printing, shipping method?
  • what is the customer’s ability to set the price – can he configure the features of the T-shirt for himself and then the price changes?
  • what is the lowest and what is the highest price of a T-shirt sold by competitors?

Where should the price of the T-shirt offered by your company be placed in the background of such a statement? The answer is always only one – at the top of the statement, that is, the price of your T-shirt should be as high as possible! Unfortunately, very many entrepreneurs think like customers, not entrepreneurs. They try to make the customer happy at all costs, as if they were the customer. However, pricing should be looked at as a tug-of-war – there is no win-win here, if I make more, you lose. If you spend less, I lose.

That’s why prices should be set at the upper end of market prices right away. If in practice it turns out that it’s too high – customers won’t come, or they’ll be interested, just because of the price they’ll give up buying – then you’ll think about how and for what reason (you have to explain it to the customer) to lower the price. The price can always be lowered, but to raise it is very difficult….

In summary, when you set the price of your product, you take into account the real costs (variable and fixed unit) of production and the highest prices of the same products offered by competitors.