How to Price Your Product When Entering a New Market

A few weeks ago, I wrote a detailed post about how to price your services. It got a lot of attention from small business owners. As a result, my inbox was flooded with more questions, and one that got my eyes was – do these practices apply to pricing the products, too?

If I give you the short answer, then yes, you can apply similar steps to price your products. However, I want to discuss some additional factors that would affect your decision. You’ll find all my insights and some helpful tips in this article.

Let’s discuss these points on how to price your product in more detail.

1. Calculate the Overall Cost

Let’s start by calculating the overall cost of your business. Here, you need to consider two categories – variable costs and fixed costs.

The former includes expenses that change based on the number of products you produce. This means that this cost can fluctuate frequently with the production level. The latter includes expenses that remain the same regardless of how many products you produce. You’ll incur this cost irrespective of the volume of production.

Example: Say you run a clothing brand; your variable costs will include the cost of fabric and packaging, whereas your fixed cost will include your office rent and electricity bills.

When we are talking about pricing your product, this should always be the first step. You need to create a list of all your variable and fixed costs and then add them both to get your overall cost.

2. Find a Good Profit Margin

Once you have a clear picture of your overall costs, you need to find a good profit margin. The most important thing to remember is that your profit margin should not only cover your costs but also make enough money to reinvest in your business and achieve financial stability.

This is a step where most business owners struggle because of the fear of overvaluing or underpricing their products. It can be hard to find the right balance and estimate your profit margin.

We’d recommend you start by researching your industry standards. Typically, each industry has specific benchmarks that guide the pricing strategies. For example, luxury goods often have higher profit margins compared to basic consumer goods.

Another great idea is to understand the spending habits of your target audience. In some cases, customers are willing to spend more for higher quality, unique features, or premium brand experiences. It can apply to tech gadgets or specialty foods. Here, you can set a higher profit margin to capitalize on the perceived value of your product.

3. Research the Market

This is usually the first step, but we are recommending it later because you shouldn’t always rely solely on competitive pricing. While being aware of market trends is important, it’s critical to develop a pricing strategy that reflects the unique aspects of your business.

For example, you can buy a “pair of jeans” for $5 or for $50. The difference isn’t just in the material but also in the quality, branding, and overall value proposition. Thus, your first steps should always be to determine your overall production costs and set a profit margin.

Once all that is established, we can move on to conducting market research. It will mostly include identifying businesses that offer similar products. You can analyze their pricing strategy to understand whether they are using premium pricing, discount pricing, or something else. Look at both their base prices and any additional charges.

Then, evaluate the current trends in your industry, gather insights on what your target audience values, and analyze how your product stacks up against competitors. If your product offers superior quality or unique features, it should justify a higher price point.

In the end, you need to ensure that your pricing is in line with market expectations while still reflecting your product’s unique value.

4. Choose a Pricing Strategy

Now is a good time to understand and determine your pricing strategy. If you go by what we discussed in the above steps and finalize the price based on your production cost + profit margin, then it would be a simple cost-plus pricing. This is the most straightforward strategy to cover your costs and achieve your desired profit.

However, you consider other pricing models, such as:

Competitive Pricing – You set your product prices based on what your competitors are charging. This helps your brand remain competitive in the market.
Penetration Pricing – This involves setting a lower price to enter the market and attract customers quickly. You can gradually increase the price later when you have established a loyal customer base.
Dynamic Pricing – This involves continuously changing the price based on market demand, competition, or other factors. It allows you to maximize revenue and respond to changing conditions.

Remember to take all the time to learn about the pros and cons of every pricing strategy. Then, select the one that best aligns with your business goals and market positioning.

5. Keep Things Flexible

Maintaining flexibility in your pricing strategy is crucial because market conditions, customer preferences, and costs can change over time. Your business needs to be able to respond to these changes promptly and effectively to stay competitive and profitable.

I will suggest that you start by regularly reviewing your costs and monitoring market trends. If you feel your production and operational costs are increasing, adjust your prices accordingly. Or, if you notice that competitor prices are shifting or there are changes in customer demand, modify your strategy to stay competitive.

Summing Up: How to Price Your Product

I hope this article helped you understand how to price your product properly. The last piece of advice I would give you is that you don’t have to get everything right on the first try. This is an ongoing process that requires regular adjustments and fine-tuning. You just need to focus on staying flexible and continue learning from your experiences.

If you have more questions about this topic or any other aspect of starting a business, feel free to reach out to me directly on LinkedIn. I’m here to help!

How to Price Your Product When Entering a New Market