We’re in the middle of a massive economic shift in the United States and around the world. Brick-and-mortar storefronts everywhere are closing down in an attempt to keep their employees and customers healthy.

To keep their businesses afloat, many owners are moving their products online. The online shopping boom is unprecedented: eCommerce sales have spiked 25% thanks to COVID-19.

These market shifts are causing entrepreneurs to re-think their pricing strategies in order to remain competitive. If your business is also making changes to compensate, how do you know which price is the right price to make sales and still turn a profit?

Thankfully, adopting a tried-and-true product pricing strategy will work even during a pandemic.

Read on for a product pricing guide that will help you boost sales and earn money

The Lowest Price Isn’t Always the Right Price

Before we get too deep into strategy, let’s address a common pricing formula myth. If you want to sell more products than your competitors, you should price your products lower than theirs, right?

Not necessarily—it’s tempting to cut prices in a down economy, but you should still avoid it. While you may sell more in the beginning, don’t give in to the urge. This type of competitive pricing can hurt both your sales and your industry in the long run. Here’s how.

Minimal Profits

For starters, pricing your products at or just above cost won’t net you enough money to cover your business expenses and still earn an income. When you operate on such a narrow margin, you won’t have enough set aside to invest in new products and improving your business. Even if you’re (barely) keeping your business afloat, you may not make enough of a profit to cover your personal expenses.

Customer Loss

Second, consumers tend to equate price with quality. If your product has the lowest price on the market, you may lose customers who assume your product is also the lowest-quality option available.

Negative Market Impact

Over time, the “lowest price” strategy becomes a race to the bottom for businesses in your industry. If you and other business owners all cut your prices drastically, everyone else will have to follow suit to maintain their competitive position in the market.

Major cost-cutting leads to decreased quality, frustrated entrepreneurs, and sometimes dissatisfied customers. This can also eventually run small businesses out of the market in favor of large corporations that drop per-product costs by operating in bulk.

A Product Pricing Strategy That Works

If offering the lowest price isn’t the way to go, what is?

Well, it isn’t the opposite approach. As you likely understand already, over-pricing your products will eventually cause many of the same problems as under-pricing. You need to take the Goldilocks approach and keep modifying your prices until you find one that’s just right.

Start With Your Costs

The first step in a good pricing formula is to identify all your costs. These may include, but aren’t limited to:

• Materials
• Manufacturing equipment
• Electronic equipment (computers, cash registers, etc.)
• Third-party services (managed IT, dropshipping, etc.)
• Shipping, packaging, and logistics
• Physical storefront (rent, utilities, internet, etc.)
• Website domain, hosting, and development
• Employee compensation
• Business insurance
• Other recurring bills

Anything you spend to keep your business running counts as a cost. Be diligent about tallying exact numbers and not missing any transactions, no matter how small. This will also make it easier to deduct business expenses come tax season.

Determine Your Minimum Necessary Revenue

After you’ve identified all your business expenses, add that number to the amount you need to live off of for a year to find your minimum needed annual revenue. Make sure to include an extra amount to deal with any emergencies that may arise.

This is how much money you need to make per year to keep your business running. While you’ll ideally blow this revenue goal out of the water, it’s a great foundation on which to base your pricing.

Understand Your Market

A seller’s market is made of two main components: the customers and the competition. Understanding both of them is essential to finding the right prices for your products.

Look through your competition’s offers and take notes of their prices. Does their ideal customer look like yours? Factor in your clients’ income levels, how price-sensitive they are, and how much they tend to spend on products like yours.

If you aren’t sure how your ideal customer approaches buying, you might want to gather information about their habits through a survey.

Putting It All Together

All three of these components make up the building blocks of a successful pricing strategy. Once you’ve identified the numbers, combine them to find out how many products you need to sell at the right price to meet your goals. Make sure to keep your revenue targets achievable and adjust them as you find out what works and what doesn’t.

Service Pricing Strategy

Pricing formulas for goods and services work a bit differently. Unlike the manufacturing of a physical product, you can’t evaluate your production cost based on materials and operations alone.

Instead, you have to base your costs around the time spent.

This isn’t only limited to “working hours” where you’re dealing directly with clients. It also includes the time spent on backend development, making content, advertising, and client-finding. Because finding new clients is often the largest time-sink, you have to optimize your process—this article explains how.

If you have no idea how many hours you spend on your business outside of “working hours”, now is the time to start tracking them. Make a spreadsheet where you track your time spent each day for two weeks to a month. Once you’ve figured out the total revenue you need to make a profit, develop a per-hour price based on your average “working hours” per week.

Settling on the Right Price for Your Products and Services

The economy may be up in the air right now, but developing a solid product pricing strategy can help carry you through these uncertain times and well into the future. Following the tips in this pricing guide can help you find the right price that boosts sales while still turning enough of a profit.

Looking for more business advice you can implement now? Make sure to check out the other articles on our site.