Stuck on how to determine pricing for your product? You aren’t alone! We’re here to give you the best practices for pricing your product for maximum profit: whether you’re setting prices for the first time or determining a price for a new product in your existing range.

In this article, we’ll cover how to find your base product costs to bring it to market, what other hidden costs to factor in, and introduce a range of different ways to determine a product price that represents the true costs of bringing your product into your customers’ hands.

## Why do I need a pricing strategy?

Before we dive in, let’s stop for a minute to talk about why you need to have a deliberate approach to your product pricing.

Simply put, how you price your product will directly impact how profitable your business is.

It may sound obvious but it’s worth going over: if you charge too little, you may not make enough to cover your costs. Unless you like losing money, this is not a situation that results in the growth of any business.

If you charge too much, you may find it difficult to attract enough customers and will suffer from cashflow tied up in unsold inventory. This is also not the path to success.

Both of these situations are clearly ones you want to avoid, so making guesses at your pricing is thus not a great idea if you want to scale your business and generate the profits you want.

Pricing is thus a tough tightrope to walk: it can take a while to get completely right, so it’s wise to have patience, be willing to experiment, and to arm yourself with as much information about pricing as possible (and you are in the right place for that!).

Now that I have convinced you that you need a pricing strategy, without further ado, let’s get started!

## Step 1: Determine your Cost Price

Your Cost Price is how much it costs you to buy or make one unit of your product.

For resellers, your Cost Price is amount you pay for the product from your vendor. This usually should include any shipping / freight you pay to bring the item to your warehouse.

For manufacturers, your Cost Price is a little more involved to calculate as it involves tallying up all the costs to produce your product from raw materials (this is otherwise known as your COGM or COGS).

Your Cost Price is also the price that would make you 0% profit if you were to sell it at this price point (this is important to note when we cover margins and markups later in this article).

You might also like to factor in the following costs, if you can calculate this easily per product. If not, you’ll want to ensure that they are covered in your overheads in Step 2.

- The cost of any packaging required
- The cost of shipping your product (only if the customer doesn’t directly pay this)

Read more: How do I calculate the unit price for a product? →

## Step 2: Factor in your Overheads

Your Unit Cost for buying or making your product is only one part of the equation. It’s also vitally important to ensure that you include your in-direct costs. These are all of the other costs associated with making and shipping your product, such as:

- Rent for your studio or workshop space
- The cost of any tools or equipment you use
- Salary for any employees (if you have any)
- Technology and website costs
- Accounting, legal, and professional fees
- Marketing and advertising expenses

To calculate your indirect costs, you will need to track all of these costs for a period of time (a month is usually a good starting point). Once you have these figures, add up all of your indirect costs to get your total overhead costs.

You can either divide this total figure by how many products you sold in that period to get your overhead costs per product, or alternatively you can use a percentage of your Cost Price to represent an estimate across the board.

Read more: How to factor in overheads in your product pricing →

## Step 3: Determine Your Target Profit Margin

A profit margin is the difference between how much your product costs to make / buy and how much it’s sold for. This difference is what’s left over after you’ve covered all of your costs, both direct and indirect.

For example, if you make a product that costs $10 to make / buy and you sell it for $20, your profit margin would be 50%. In other words, for every unit sold, you’re making 50% profit.

Your target profit margin is how much profit you would like to make on each unit sold. This will be different for every business, and will also change over time as your business grows and develops.

Read more:

- How Much to Mark Up Your Products: Tips for Small Businesses →
- The difference between markup and margin: A simple breakdown →

## Step 4: Calculate Your Selling Price

Now that you have your total costs, how do you determine how to price your product so that you make a profit?

There are three main ways to do this. We’ll introduce them here, and then go into more detail on each method in the sections below:

- Cost-plus pricing
- Target pricing
- Competitor pricing

### 1. Cost-plus pricing

With cost-plus pricing, you start by calculating how much it costs you to make your product (your “cost of goods sold” or COGS), then add a margin on top of this. The margin is what will become your profit.

This is the most straightforward way to price your product, as it doesn’t require any guesswork or estimation: you simply add up all of your costs, then add your desired profit margin on top.

To calculate your cost-plus price, use this formula:

```
COGS + (COGS x markup) = cost-plus price
```

For example, let’s say it costs you $10 to make a product, and you want to add a 50% margin. This would give you a retail price of $15:

```
$10 + ($10 x 0.5) = $15
```

You can then expand this pricing formula to include internal labor (to create your product), overheads / in-direct expenses, and any commissions and fees involved in selling the product.

```
COGS + (COGS x markup) + labor + overheads + fees = cost-plus price
```

### 2. Target pricing

With target pricing, you start with how much you want to sell your product for, then work backwards from here to determine how much it can cost you to make it. A word of warning here: if you can’t figure out a way to make it for this cost or less, then you’ll want to try another approach to avoid losing money!

This is, however, a useful method if you understand how much your target market is willing to spend on products like yours. It also allows you to consider any shipping or other fees when calculating your target price.

To calculate your target price, use this formula:

```
Retail price - shipping & seller fees = Target price
```

For example, let’s say you want to sell your product for $40, and you estimate that shipping and other fees will add up to $10. This would give you a target cost price of $30:

```
$40 - $10 = $30
```

With this target cost price, you’ll now want to calculate your COGM and then see if you can make this number less than your target cost price.

### 3. Competitor pricing

With competitor pricing, you start by researching how much similar products to yours are selling for, then price your product accordingly.

This is a good method to use if you are just starting out and don’t understand your target market or how much they would be willing to spend on a product like yours.

It’s also useful if you understand your direct competitors and how they price their products.

## Step 5: Test and Adjust Your Pricing

Once you’ve determined how to price your product, it’s important to test this out and see how it goes.

You may find that you need to adjust your prices up or down based on customer feedback and sales data.

It’s also important to keep an eye on your competitors and how they are pricing their products. If they start selling at a lower price than you, this could impact your sales.

Finally, as your costs change (e.g. you find a cheaper supplier for your raw materials), make sure to adjust your prices accordingly so that you can continue to make a profit on each sale. Using pricing software to automatically manage this can be useful if you have a large product range with fluctuating material costs.

Pricing your product doesn’t have to be difficult or time-consuming. By following the steps above, you can confidently price your products to maximise your profit margins.

See more: Pricing Mistakes (And How To Avoid Them) →

## Craftybase - pricing and COGS management software for small manufacturers

Craftybase is a cloud-based pricing software solution that helps small manufacturers track their costs, calculate their COGS, and price their products for profit.

With Craftybase, you can easily add your materials, labor, and overhead costs, then see how these costs impact your COGS and final product price.

With Bill of Materials tracking, COGS and inventory management all built in, it’s the complete solution to your pricing woes. Try Craftybase for free today.