The optimal price, or the price that would provide you with the greatest amount of profit, is a key number that you will want to figure out as a seller. This price is also known as the profit-maximizing price, stemming from its definition. After all, if your price is too low, that means that while you are moving a lot of your product, you aren’t making the greatest amount from it that you could. On the other hand, if your price is much greater, then you will not be moving as many units as you could be thus, once again, not providing you with the greatest profit. Now, the optimal price can be found for products as well as services, however, there are a number of different ways that you can do so. A lot of the time, though, it is figured out by trying out different things and learning from your mistakes. However, as soon as you have figured out the number that creates the perfect amount of sales, know that that is the optimal price. So, how do you set it?
Well, as we mentioned before, figuring out the best price point for your product or service is critical as it plays a big role in the success of your company. While it is easier said than done, here are a few pointers that will help make the process of establishing your optimum price a little bit easier.
Figure Out the Perceived Value
Begin by trying to figure out the value that your shoppers perceive your product or service to have. Indeed, this value is so much more important than the actual value of it. What’s more, is that you want to make sure that the perceived value is higher than its actual value. Once you have figured that out, you will be able to figure out what its maximum price is.
Check Out Your Rivals’ Prices
In addition to figuring out its perceived value, you also want to make sure that you take into consideration the amount that your competitors are charging. After all, you want to figure out how you can make your product or service more distinguished to that of your rivals’. That being said, keep in mind that if you are selling a commodity, you will not have as much wiggle room to shift around your price.
Take a Look at Your Variable and Your Fixed Costs
The first costs that you are going to want to take into consideration are your variable ones as they are the ones that will increase the greater your revenue becomes. Some common variable costs include things like the cost of labor or your materials, for instance. They are also useful for figuring out what is the smallest price that you can charge your product or service. After all, if you sell at a price underneath the variable price, you will actually end up losing your money rather than making some. In addition, you can also figure out the variable contribution, which is how much you can make from every piece that you end up selling, by subtracting the variable costs from the price.
Fixed costs, on the other hand, do not change. Take, for instance, your rent; the amount that you will pay for rent will never change depending on how much you end up selling. Now, in order to figure out how much you will have to sell in order to break even, you have to divide those fixed costs by the variable contribution. If you are not able to sell that many pieces at the moment, for example, then know that your price is not high enough, which is why you should raise it.
In order to figure out how much you need to sell in order to make the profit that you desire, you will first add your profit goal to the fixed costs and then divide that sum by the variable contribution. Depending on the number of pieces and your price, you may need to make some adjustments in order to ensure that you can meet those numbers. In addition, based on economic theory, whenever prices increase, you can expect your volumes to lower. As a result, there is a big chance that you will have to adjust your prices with time to figure out how they impact the amount that you are making.
We also urge you to look after your competitors as there are most likely others who are selling items or services like your own to the people that you are trying to target, too. Indeed, it is key that you act accordingly based on the moves that your competitors make. Make sure that you are tracking everything, too, as that information will be just as useful in the long term.