How to price your product of service is a frequent question we get from clients. In this post, we briefly discuss cost of inputs, markups, and pricing considerations.
Enter your cost of inputs
First, enter your cost of inputs. These inputs are the direct costs per unit of revenue the company incurs to produce its product or provide its service.
The unit of revenue is the unit of measurement for each sales transaction. Common units of revenue are per item, per bundle, per hour, per month, per download, etc.
Direct costs per unit are all the costs that are embodied in that specific product or service that are traceable to that particular sales transaction. For example, if a one-hour music lesson involves paying a teacher $50/hr and $10/hr of studio time, then the direct cost of inputs is $60. If you are a solopreneur giving one-hour music lessons at home for an hourly fee, your labor costs should be lower than the hourly fee because you will have operating expenses. In other words, if you pocket the entire lesson fee and don’t save anything for marketing, insurance, maintenance, utilities, etc. then your company will be operating at a loss because all revenue will be taken up by labor costs. Thus, you need to mark up the cost to get to your price.
Decide on your markup
Second, decide on your markup. Markup is the amount over the cost of inputs that goes towards operating expenses such as rent, marketing, payroll, insurance, and so on. Furthermore, your markup also goes towards profit.
A markup can be expressed as a percentage (%) or a multiple (x). For example, a 50% markup or 1.50x markup. Then, simply multiply the per-unit input cost by the markup multiple or by 1+markup percentage. For example, a 50% (1.50x) markup on $10 becomes $10 x (1 + 50%) = $15.00.
So why not have as high of a markup as possible?
So why not have as high of a markup as possible? A markup is highly dependent on industry averages, market tolerances, and brand equity. If your competitors are charging a lot more or less, your pricing should be adjusted accordingly. Also, if your customers are price-sensitive or can tolerate high prices, your pricing should reflect that. Lastly, brand equity is the value a brand holds in the eyes of consumers. If you price your products and services too far out of line with your brand equity, it will affect how your customers perceive the worth of your offerings.
So what markup should you use? Look at your competitors’ prices. Then consider your customers’ needs. Also, factor in macro conditions like inflation. Lastly, weigh your operating expenses, budgets, break-even quantities, and future plans. There is no cookie-cutter solution, so contact us today so we can look at your production costs, industry and market climate, and more to determine which pricing options work best for you.
