Really broad question, and probably really simple, but when a product (of any kind) finally hits the shelves, what makes it the price that it is? How is it determined?
In: Economics
Cost to produce is really the minimum. Yes, there’s the concept of loss leaders, but for the most part if a product can’t fetch a price above production cost it doesn’t get sold. This is one of the main benefits of economics in general – resources are not put into products economically inefficient to produce (i.e. products people don’t really want).
Let’s assume you can meet that threshold. I’ll start by saying there’s entire industries that go into figuring out exactly how much to charge for given items. But these are the types of things looked at. Let’s use the example of selling shaving cream.
1. Cost of competitors’ shaving cream. For example, if my competitor sells for $5 a can I probably can’t charge $30 a can, no matter how good it is.
2. Cost of similar items which can be substituted for shaving cream. If there’s another product for $5 a bottle that can serve in place, although not as good, again I probably can’t charge $30 a can.
3. Benefit of product, whether or not people are willing to forgo shaving cream entirely. The customer will just accept a cut up face instead of just paying the money.
4. Quality of your shaving cream over others. If my shaving cream works better than my competitor, I can charge a premium. If it’s works worse, than I probably have to accept some type of discount on their price.
5. Strength of your shaving cream’s branding and marketing ability. When people walk into the store, they recognize my brand from all my commercials and are willing to pay a little more than my competitors whom they don’t know.
Notice how everything revolves around looking at the market and making judgements based on what other people are doing.
In practice, it’s sometimes trying stuff to see what works. Focus groups may be used, maybe you ask, “If our shaving cream left you with smoother skin would you pay a dollar more per can?” Maybe you raise the price and see how that impacts sales.
The basic principle is that for each increase in price I’ll lose some amount of sales, so I am always trying to find that sweet spot where price and sales level brings the maximum dollars.
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