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Setting the Best Price for Your Products or Services

How to set prices

The price of your product depends on three variables. First, the cost of your product will define how much you need to charge to make a profit; second, your competition will have an effect on how much you can charge your customers; third, the uniqueness of your product will determine how much more you can charge than your competition.

Your production costs help determine the minimum amount you need to charge for your product. Production costs are typically variable costs. That is, they vary depending on how much product you are manufacturing or service you are delivering. They include the amount of space required for production activities, the number of employees hired to meet demand for product and other costs such as shipping and packing material. You will learn more about this in Section Business Costs and Expenses.

All things being equal, your competition will drive your pricing strategy. You have choices to make regarding where you want to be in the market. Some business people are content to run a moderately profitable business by undercutting the competition and selling cheaply made products. Others prefer to sell high-end products to perhaps a smaller group of customers, who want the best available product and are willing to pay a premium. Apple, for example, sells its computers for three or more times what the competition sell their products. Apple is unique since it runs on a different operating system and markets their uniqueness. However, Apple and its competitors provide products that essentially do the same thing—provide Internet applications and run similar software. You need to decide where you fit in the mix and then execute a plan to drive your company‘s future.

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