Since the beginnings of capitalism, we have loan database been able to see the relationship between how much a product demands in return from those interested in its possession.
Note that I didn’t use the word “value”, as we will use this expression when we are talking about Value Proposition.
So, remembering the concepts of barter, for example, a product was given by me when I wanted to have access to another. Therefore, I could give 5 tomatoes and receive 8 oranges. In other words, 5 tomatoes was the price to have 8 oranges.
At that time, the accumulation of wealth was not yet the goal – until the arrival of mercantilism. That is to say, if I “charged” you 5 tomatoes to deliver 8 oranges, that was what I saw it costing me and I really needed it. I would not charge you more just for my accumulation, profit was not the intention ;
Of course, at that time, the market was not regulated and each producer established their commercial relations in the way they thought best. This is just a very simple historical example to introduce a subject that has now become much more complex than it was 800 years ago.
3 ways to price products
In today's market logic, when we produce something and think about its price, the first question that comes to mind is: how much did it cost me? From this, we can work with a price that is at least above the cost, to avoid our losses.
But what about above costs? And where does competition come into this story? How do we think about all this? Let's go!
1st How much profit do you want to make?
First of all, the first way of pricing a product is the most traditional method . After analyzing your production costs and dividing them among the units produced, you just need to think: how much profit do I want to make?
Initially, if the unit of your product costs you 8 reais, and you want to make 2 reais in profit per unit, you set the sales price as 10 reais.
Or, you don't know how much profit you want to make per unit, but you have a target total profit. If, in the same example, you plan to sell 500 units per month and want to make a profit of R$500, you have to make a profit of R$1 per unit – that is, the sales price must be R$9.
But this may seem simple, right? However, as I said, it is quite traditional and disregards important factors of competition and market differentiation .
2. How much are your competitors charging?
Let's say that, using the previous examples, after pricing the product, you decided to charge 10 reais. But when you do market research, you find that your competitors charge R$8.50. "What now? Will I make 50 cents profit per unit?"
You have a few choices. The first is to charge the same and bet that customers will prefer your product, making them switch to your company. The second is to charge less and take customers away from your competitor because you have a lower price.
But what no one tells you is that those who come for the price, also leave because of the price . What if your competitor's product costs R$6? He still has R$2.50 of margin to "fight" on price before making a loss and you don't know it! As soon as he lowers it to R$8, the customers who came to you will go back to him.
But there are not just 2 paths you can follow, there is a third !
3rd How much is your product worth?
This is an extremely subjective question, but an important one at that. Remember when I said at the beginning that I was going to talk about value ? We have reached that point!
Before we talk more about value proposition, I need to tell you the truth about the product pricing process: the 3 methods are complementary . You need to cover your costs, forecast your demand, plan your profit and analyze your competitors. But it can't be just that .
What makes your product different? What does it do that only allows, generates or makes things easier for people? This is the value proposition of your product. With this clearly defined, a competitor can charge 10 reais and you 25, and you will have loyal customers who love the brand and identify with it.
Price isn't everything, it's volatile and people are too, but what your brand and product do to customers isn't. Get out of the price war and charge what your product is worth.
But here's the caveat: customers must see the same value proposition that you imagine for your product! I may think I make the best cake in town and try to charge as such, but if that's not true for customers, they won't buy it even if it's cheaper.
Think of yourself as a consumer, even before being an entrepreneur: if a brand calls itself the best at what it does, but you prefer another, what do you think of that speech?
Two great examples: the famous Toddy vs. Nescau or Burger King vs. McDonald's disputes. Whether you're a fan of one brand or the other, you're unlikely to buy from a competitor just because they've lowered their prices. Because you're buying more than just the product, you're buying the brand, the value, the purpose and the experience.
Free stock photo of appliances, work environment, steel
And how to combine the 3 approaches to product pricing?
In any case, now that we have a good understanding of the context and the difference between some concepts, it is now time to get down to work. I will show you the chronological order of the actions in 6 steps:
Step 1 – Map your costs
First of all, what do you produce? Food, machines, valves, clothes? Regardless of what it is, I need to tell you that costs are not just raw materials ! Many entrepreneurs consider costs only to be the amount they spend on raw materials and this can be very dangerous!
Before you forget, to correctly price products, you need to take into account the electricity you use, the water, the labor, the marketing… Everything that is involved in your production and sales process.
For example: you use 1 kg of wheat flour, which costs 20 reais, to produce 10 cheese breads. Each cheese bread absorbs 2 reais of the cost of this raw material. And so on for the entire production process.
Attention : what many entrepreneurs overlook is the cost of depreciation of the machinery and equipment used. Using the Wikipedia definition : depreciation is the loss of value of an asset resulting from its use, natural wear and tear or obsolescence .
In other words, each tool used in your production has a useful life and you need to add this wear and tear to your costs – after all, when the equipment is no longer in usable condition, you will need to buy another one.
Step 2 – Analyze your competitors
Unless your product is innovative enough to create a blue ocean, you most likely have competitors in the market you are entering. You need to look at them and understand:
What do my competitors offer?
What makes each of them different?
How much are they charging for this?
Record this and analyze your inputs in detail. Líder helps you understand the market and define your strategies!
Step 3 – Define your differentiator
You already know your costs and you already know the market, so what are you going to do differently? You may not create a blue ocean, but you still need to differentiate yourself from the competition.
And remember: your differentiator is not a low price! Focus on the customer experience. Think like your customer! What would make your customer spend time and money with you again? What would make them recommend you to their friends? Pricing a product cannot ignore this step!
Step 4 – Make your strategic planning
Do you want your business to be sustainable or to close its doors after 3 years, being nothing more than an adventure? If you prefer the first option, you need very clear objectives and that is what strategic planning gives you .
That said, where do you want to be next year? How much do you want to make? What is your vision? In 3 years, do you want to be the biggest in the city?
Only from this can you plan your daily actions , all guided by your vision . Learn more about strategic planning!
Step 5 – Define your markup
Do you already know where you want to go? Great! After the strategic part, we come to the operational part for product pricing.
And for this we create a markup, but what is it? The markup is an indicator that shows, in fact, how much your sales price is above your costs. By defining this little number , we can continue to price our products.
Since these are somewhat more complex calculations, I won't just give you an example, I'll put a link here so you can do your own simulation on Líder's spreadsheet! Click here and take a look. If you have any questions, feel free to contact us!
Step 6 – Fail fast and learn fast
According to andragogy (the science of guiding adults to learn), we only learn 10% by reading or listening. In other words, we need to get our hands dirty!
Go ahead, do it, make mistakes, correct them and learn! Record your action plans, record the changes you made. Knowledge management will make things much easier for you in the future. Know what you have already tested and what worked and what didn't.
