How Much Should You Charge For Your Product or Service

There are a lot of ways to put a price on your product or service. These methods usually take into consideration the many important factors that affect pricing. Some of these information include market positioning, product demand and raw material costs. If you want exclusivity, then put premium tags on your products. If the cost of your raw materials often shift, then your selling price should be able to cover such fluctuations.

Aside from these factors, one must also evaluate the pricing objectives of the business. Are you hoping to maximize sales quantity? Are you hoping to achieve short-term high profits? Are you planning to launch a price war against your competitors? Whatever the reason may be, it is necessary for you to study your product and your market to be able to achieve competitive pricing and optimum profits.

However, what if you’re just a stay home mom who’s hoping to earn some money by selling baked goodies? Or maybe you’re just an amateur photographer hoping to get some extra income during his free time through simple photography services. It may seem too extreme to immediately go into a complex price study for your venture. You may not have the time to gather all essential information nor the resources to fully analyze your pricing scheme.

If that is the case, then you can follow these simple pricing techniques:

30% profit margin for buy-and-sell items
A small store in your neighborhood is selling quality homemade soaps for P50. You can sell these products to your officemates for P65. The simple formula here is to multiply the product cost by 1.3 and the result is your selling price.

130% profit margin for make-and-sell items
You plan to sell custom designed fancy bracelets to your friends. The raw materials costs P1,000 while your other expenses such as transportation costs P200. With that inventory, you are able to produce 15 bracelets. The formula here is to multiply the production cost of the product by 2.3 to get the selling price. In this case, P1,200 multiplied by 2.3 equals P2,760. Divide this by the total output and you get the selling price for each bracelet which is P184.

10% of production cost for amateur services with high material expense
A friend liked the way you designed and landscaped your garden and asked you to also do theirs at home. You estimated that you will be spending P5,000 for the additional plants and other materials that you will be using to execute your design. Add 30% in the product cost (consider this as a buy-and-sell item); 10% of the result is your service charge. Thus, P5,000 x 1.3 = P6,500. Simply multiply the result by 1.1 and you get the total cost of the project. P6,500 x 1.1 = P7,150.

80% of current professional fees for amateur services with low material expense
A couple is having second thoughts on hiring a professional videographer for their wedding which is asking for P10,000 as fee for their service. If you think you can do the task and possess enough technical expertise to execute the job. Then offer to do the project for 80% of the professional offer or P8,000. Just multiply the amount by 0.8 and you will get your price tag.

Relative rate for freelance professional services
You are a software programmer by profession and a friend is asking you to develop a customized system for his business. You can finish the project in ten days if you work for 2 hours every day. If your current salary is P20,000 a month for an eight-hours-a-day, five-times-a-week job, then your hourly rate is your monthly income divided by 160 (number of hours you work in a month). The result is P125 per hour. Multiply this by 20 hours (2 hours x 10 days) and you get the amount you will have to charge your friend, which is P2,500.

These pricing strategies are based on best known practices which I learned from freelancers and entrepreneurs. The formulas offer a way for you to have a start-up figure to estimate how much you should charge for your product or service. Ater using the techniques above, feel free to adjust your rates according to fair market prices and other factors which you might want to consider. As your venture grows and other financial elements start making an impact on your business, it is advised that you apply more extensive techniques and calculations into your pricing scheme.

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Works Cited:
Allen, Scott. “About.com: Pricing Strategy“. Retrieved January 2008.

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Photo courtesy of lh tanG