Episode 96 - Pricing your products
Jul 16, 2017
Small business owners typically struggle with pricing their products, especially digital products. In this episode, we discuss the factors that must be considered when setting your prices.
For more information about pricing your services, check out episode 90.
The components of pricing
There are four components of pricing:
- Direct materials - These are the materials that go into each unit of your product. This might be the cost of a product that you have someone else manufacture for you or bonus items you give away with the cost of a digital course (maybe you mail a welcome packet or t-shirt). Direct materials can also be the cost of software that is incurred on each sale (if you are selling software as a service or other products with incremental software costs).
- Direct labor - This is the direct cost of labor to make or provide the product. An example of this would be the cost associated with your labor to record videos for a monthly membership site like Small Biz HQ. This would also be the cost of editors and graphic designers for your new book.
- Overhead costs - Overhead costs are all of your other costs associated with running your business. This includes other materials, labor, selling, and administrative costs. This definition is slightly different than the traditional accounting definition but it helps to simplify things.
- Profit - Yes, you must actually figure profit into your calculations. There are a few different ways to do this. The most common way is to calculate your monthly desired profit or profit over the life of the product. For products with a longer lifecycle, I want to include monthly profit. Your profit should include your take home pay, any savings you wish to retain in the business, and your taxes.
You must also estimate how many units you can sell per month or over the lifecycle of the product (if it is short). Typically, we are very conservative with our estimates. If you estimate too high, you may end up not being able to cover your costs. If your estimates are conservative and you sell more units, your profit will be higher (which is a really good thing!).
Total Costs + Profit / Estimated Number of Products Sold = Price
Delays and procrastination will cost you
Time really is money. As the time you take to get a product to market increases, so do your costs. All of these costs, including the cost of your time, must be recovered. Here are some tips to minimize delays and procrastination:
- Have a plan to get new products to market in 30 to 60 days.
- If longer, minimize costs as much as you can.
- Work off your strengths to develop new products more quickly.
Additional advice for physical products
- Look for price breaks on order quantity but balance with storage and other costs.
- Look for print on demand for books.
- Discuss your plans with an accountant to avoid headaches, especially when working with affiliates or fulfillment in another state.
- Discuss your plans with an attorney for intellectual property, claims, and safety issues.
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