This Is What You Need To Know Before You Can Price Your Product

Seven steps to get to a proper pricing equation

Pricing a new product is one of the hardest things you’ll do.

I’ve been through pricing decisions that have taken months, only to still get it wrong. It’s been argued to me that it’s easier to raise the price than it is to lower it, and I’ve been told I was crazy for doing the reverse. I’ve missed the mark way too high and way too low, and I’ve stuck by my guns, painfully, until I was proven right.

When you’re pricing a new product, there are a lot of moving parts in the equation. It’s not something you can just whiteboard or throw into a spreadsheet or sit in a room and brainstorm.

Before you price your lemonade, you need to know a lot more than just the cost of the lemons.

Here’s what most folks either miss or do out of order.

Gate 1: COGS

Before you can even think about how much you can sell your product for, whether that product is software, hardware, or sandwiches, you’ll need to know everything there is to know about the direct costs to produce the product itself. This is known as Costs of Goods Sold (COGS).

Please don’t try to determine indirect costs — the costs for distribution, sales, marketing, overhead, and so on — with this first pass at COGS. You’re just setting yourself up to be wrong later on, because:

1. There is enough variability in the direct costs to make your head spin.
2. As far as pricing is concerned, COGS should not change drastically as you scale. In other words, whether you’re selling one product or a thousand products, you want the COGS per item you use to set pricing to remain relatively unchanged.

Yes, you may see some gains buying in bulk, but again, when you’re pricing the product, you haven’t bought in bulk yet. You need to settle on a standard level of purchasing, inventory, and manufacturing to get the COGS you need to be able to price.

Gate 2: Indirect costs

Indirect costs are where you can start introducing scale in terms of its impact on margins.