There are several ways to determine your product price. The first priority is making sure you cover your production or supply costs. Manufacturers that produce products usually have cost accountants who analyze how much is spent on raw materials. Labor and advertising also need to be factored so companies can make a profit.
Many companies start out with relatively high prices if their product is in high demand. For example, the new capabilities of a cell phone may drive up demand. The company knows people want the product so they may price is higher than average. The higher-priced strategy helps companies recover their initial expenses relatively quickly. Start-up companies in particular struggle to make a profit early on. They have a lot invested in their products, promotions and new employees. However, a company must also know how competitors are pricing similar products. When competition is stiff, and when the market is saturated, prices tend to level off. Those who don’t follow this strategy will lose customers.
Another way to find the right price is by asking consumers or paying customers. Many companies conduct surveys to determine viable price ranges for their products. They typically test a particular range of prices, then choose a price within that range. They may select a price that provides them with a 20 percent markup, for example.