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This video will help explain product pricing and break-even analysis. Make sure to watch the other videos and read the user guide for additional information. Product price is what consumers will pay to purchase your product. It is how you generate revenue. Pricing is one of the key challenges you face when running a business.
Here we'll want to set a price that is high enough for you to generate as much revenue and profit as possible, but the price cannot be so high that it will drive customers to buy from a lower priced competitor or one that offers more value. To determine a profitable
price, you have to determine your break-even point and then add an extra amount for profit to the company. For example: if a product costs $10 to manufacture, ship, market, and sell - then you should set the price of the product at more than $10 otherwise you will be losing money on every sale.
Let's take this example further. Let's say that you are going to manufacture 100 products. Each product costs $5 to manufacture for a total cost of $500. You are also going to spend $500 on shipping, marketing selling, and all other costs combined. Your total costs are now $500 for manufacturing plus $500 for everything else which equals $1,000 in total costs.
Assuming you plan to sell all 100 products then your break-even price is $1,000 in total costs divided by 100 products, which equals 10 dollars. This means that if you sell all 100 products at $10 each you will generate one thousand dollars in revenue which matches your $1,000 costs. Your profit will be $0. To make a profit you will have to sell each product for more than $10. If you sell each product for $11, you will make $1.00 in profit for each product you sell for a total of $100 profit.
Is $1.00 in profit per product enough? That's for you to determine. How do you know if you can raise our prices there is no preset price that consumers are expecting to pay for your product. The amount of money consumers will pay for your product depends on two factors.
One: How well your product fits customer needs. You can discover this by reviewing
the consumer psychographics in the consumer profiles report.
Two: How well your product is priced compared to competing products.
For example: If a consumer is completely price conscious and does not care about brand or product features then they are going to buy the lowest priced product on the market. If a
consumer wants specific features or a brand and their psychographics show that
they are not very price sensitive then this consumer will likely be willing to
pay more for a product that matches their needs. There are two other
considerations when doing your forecasting. First: If there is a reseller
discount sales commission or other compensation earned by the seller of the
product, your price will need to be even higher in order to cover these amounts.
Second: Keep in mind that forecasts only work as long as you sell all of your products. If you manufacture 100 products, but do not sell all 100 of them, your revenue will be lower than expected and this will negatively affect your
Review your budget and use the strategy journal and WHAT IF? calculator to help with your price planning. As the simulation advances each period you will be able to discover new information about the market and your competitors. Use that information to adjust your pricing strategy so that you can best reach your business goals.
Good luck and GoVenture!