If you’ve just started out in your pet business or you are taking a fresh look and adding new products, you face a big question: how do you set a price on your product or service?
- Do you pick what seems to be the most straightforward option by determining your own costs and then add a simple mark-up (called cost-plus pricing)?
- Maybe you could look at your competitors and try to match what they ask (competitive pricing).
- Or should you lowball your price just to get in the game (penetration pricing)?
- Perhaps you’ve also seen other petpreneurs launch a new online course by starting out at a higher price to get their most eager clients onboard, and then lowering their fee to attract more price-conscious consumers (price-skimming).
- If, like many petpreneurs, you are offering a product or service that reflects your unique style or expertise, and you feel customers will value your product over competitors, value-based pricing may provide you with the most profit.
The most important aspect of the pricing strategy you choose is that it needs to enable you to sustain and grow your business. Does this mean you have to stick to just one strategy? Absolutely not! There are benefits and efforts to each, and a combination of several might turn out to be the right pricing option for you. Each strategy also helps you look at your business in a different way. For example, cost-plus pricing gives you a gritty look at the real costs of business. You need that reality check before diving head-first into your industry. Looking at competitive pricing urges you to do the research into how other businesses like yours are pricing similar services and products. And hey, you might use penetration pricing when you launch your business as a special offer to your target customers.
Let’s look more closely at two: Cost-plus pricing and Value-based pricing.
Cost-plus pricing is straightforward to estimate. Quite simply, it’s math, and it’s a good way to discover your bottom line.
With cost-plus pricing, you add up all of your costs and build profit into your price. This strategy is especially suitable for petpreneurs who are offering a product in a crowded market–for example standard collars and leashes–where low prices count strongly in customer decisions.
- First, you’ll determine your variable costs. These include the cost of goods sold—the material and labor used to create your product—plus packaging, promotional materials, shipping, commissions, etc. These are called variable costs because they will change depending on if you sell more or less of your product or service. The value of your time is also a variable cost. Set the hourly rate you want to earn from your business and divide by the number of products you can create in that time.
- Second, you’ll include your profit margin. Profit margin is the difference between your variable costs and your selling price on a product or service–it is your planned profit. Your profit margin may take some adjustment as you determine your final price. You need to be sure your final price isn’t so much higher than your competition that your customers balk at the price, and you’ll also need to cover the fixed costs of your business that we’ll be discussing in a moment.
Here’s where the math comes in (of course there’s math)!
- Take your total variable costs. Let’s say this is $30.50 per product or service
- Divide this by 1 minus your planned profit margin. For example, if you plan to make 30% profit (1 minus .30 = .70) then you’ll divide 30.50 by .70
- This gives you a base price of $43.57 with a profit of $13.07 per unit.
- You can find a handy calculator here. Enter your costs and profit margin to determine your revenue (price) and profit.
- Third, consider your fixed costs. These are costs you cannot avoid that don’t change with your business volume varies, including insurance, rent for space or machinery, utilities, etc. If you make 1 or 1000 products, these costs remain the same. While monthly fixed costs don’t change, their impact on your business bottom line can be higher or lower depending on the number of goods or services you sell. For example, if you produce and sell 50 custom dog harnesses each month, $2 of your $100 monthly insurance payment is included in the cost of each harness. However, if you produce 100 harnesses, the fixed cost per harness falls to $1. Therefore, you’ll need to determine how many units of your product you’ll have to produce at the profit margin you’ve chosen to be sure you are covering your fixed costs.
Shopify has created an extremely helpful break-even analysis spreadsheet where you can enter your variable and fixed expenses to determine how many units you’ll need to produce. You can download it here.
At the end of the month, you’ll want to determine your gross profit margin—the amount of money left over from the sale of your products after subtracting the cost of goods sold. By example, if you have $5,000 in sales of your dog harness and your costs were $2000, the gross profit margin was $3000. Like your profit margin, the gross profit margin is also expressed as a percentage, in this case 60%. Calculating your gross profit margin will show you if your sales are covering your costs. If your gross profit margin is falling short over time, you’ll need to revisit your product profit margin.
So how is cost-plus price different from value-based pricing?
Your variable and fixed costs are still vitally important in value-based pricing, but you will set your final product or service price based on far more than a standard markup.
Value-based pricing is all about understanding what your customer needs and values, and chances are good this is what you love about your business as well! Just starting out in your business? Give value-based pricing a close look. If you want a business that will retain and grow customers, and work you enjoy, find out what your customers really want. Just as you want personal fulfillment from your job, your customer wants more than just a transaction.
Instead of thinking “what’s the cheapest way for me to run my business so I make the most profit at the end of the month,” look at your business and think: “How can I develop and market my products and services so my clients find them incredibly valuable–so valuable that they become super loyal to my brand, tell others about my business, and are even willing to pay a higher price for what I offer?” How can you make your business more trusted, more fun, or provide more personal contact, more expertise…whatever it is your customer is looking for above and beyond just “finding someone to walk, photograph, or board my dog?”
While you might use cost-based pricing to sell standard collars and leashes, you’d look at value-based pricing for your unusual and beautiful artisan collar-leash sets that could last a lifetime (were it not for those daily dog-rolls in the dirt!). Are you crafting products that offer something special and a brand that provides a special experience? Are you selling services–like training, pet-sitting, or coaching–that provide a value that others don’t? How does your customer feel when they visit your website or receive your welcome email?
With value-based pricing, you base the price of your product or service on how much your customer believes that it is worth, rather than applying a standard profit margin over production cost.
That means creating a high quality experience as well as a high quality product or service. Then you continue to adjust your product and services as needed based on feedback from your customers, and continue to develop that amazing value experience.
Value-based pricing is less straightforward to estimate than cost-plus pricing, but it is more profitable. This allows your business to grow in good markets and sustain itself in downturns. You are looking outward at your audience rather than inward at your costs and profit margin. If you offer a product that perfectly meets your customers’ needs and they value your product more than your competitor’s, they will be willing to pay more. However, you need to make the effort to be hyper-aware of exactly what your customer is looking for.
Value-based pricing requires understanding and matching what your customers value. You evolve your product, your packaging and other marketing to the needs of your market. Does your product or service solve the client’s problem? What are they expecting from you, and why should they purchase your service rather than someone else’s?
Value-based pricing is a great fit for petpreneurs. Dog trainers, behaviorists, photographers, dog-walkers, pet-sitters, and artists thrive when they find their unique niche and forge a loyal relationship with their customers. That relationship is part of why you love your daily work so much! The pet parent trusts your business with their pet, whether it is for a product, a service, or a lasting creative image. Pet parents are not shy about giving feedback, so ask them for it! Keep an eye on how much your business and services actually cost you by exploring cost-plus pricing. But don’t miss out on the profit–and the value to both you and your customers–by looking at how your business can grow with value-based pricing.
Whether you use cost-plus pricing, value-based pricing, or a combination of both, you don’t need to stress over getting everything just right. Remember, your pricing will evolve along with your business. You always have the opportunity to adjust as you go, and as customers provide you with feedback or your market changes.
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