The Expert Guide: How to Price Your Brand’s Products for Maximum Profit
At The Folklore, we’re passionate about helping brands navigate the complexities of the global market. We understand that pricing is crucial to business strategy, which is why our recent member’s-only webinar focused on valuable insights, valuable tools and the knowledge to price products properly, ensuring profitability and long-term success.
The retail world is competitive and pricing is not just a number; it’s a strategic tool that can either make or break your brand’s success. Getting your pricing rights helps communicate your value to consumers. Whether you’re a startup or an established brand trying to find the sweet spot for your products, pricing is crucial – it can be the different between thriving or struggling to stay afloat.
The session’s speaker is Sade Parham, a retail consultant, the co-founder of X and O Consulting, and proud freelancer available on The Folklore Source, who shares her knowledge in the science of pricing, strategies that balance profitability with being competitive, and how to adapt in a changing market.
Parham brings a wealth of experience spanning retail, e-commerce and business development. Her journey began as a buyer at Macy’s, where she honed her skills and understanding in retail dynamics and consumer trends. She then went on to Meta as a category manager leading Facebook and Instagram Shopping, where she dove into the world of digital commerce. Parham is passionate about supporting under-represented businesses and has worked with the Fifteen Percent Pledge on mitigating the challenges faced by Black-owned brands and small businesses. Today, she is the co-founder of X and O Consulting, which is a firm dedicated to empowering early-stage businesses. Through X and O, she provides strategic insights and industry access to entrepreneurs, helping them navigate the complex landscape of retail and e-commerce.
Determine Your Cost of Goods (COGS)
The first step in setting the right price for your product is to calculate your “cost of goods sold” or COGS. This figure includes all the direct costs associated with producing your product — materials, labor, and manufacturing overhead.
For instance, if you’re creating a skincare product, consider everything from the ingredients to packaging, freight, and even development costs if you‘re working with a formulator. These are your fixed costs, and understanding them in detail will allow you to see how much revenue you need to generate to remain profitable. The goal is to ensure your gross profit (revenue after deducting COGS) is high enough to sustain your business.
Pro Tip: Many brands overlook small expenses like shipping, freight, or packaging costs. Ensure these are accounted for in your COGS so there are no hidden surprises eating into your profits.
Understand Direct vs. Indirect Costs
When pricing your products, it’s important to distinguish between direct and indirect costs. Direct costs are tied to the production of each product, while indirect costs, like rent, staff salaries, and marketing, are not directly related to a specific product but are still essential to running your business.
By keeping your indirect costs as low as possible — especially in the early stages of your business — you can better gauge your demand and adjust as your business scales.
Key insight: Indirect costs can fluctuate, so it’s essential to stay on top of these expenses to ensure they don’t negatively impact your pricing structure.
Avoid Frequent Pricing Changes
While market conditions may change, it’s generally not advisable to adjust your prices frequently. Pricing instability can confuse or alienate customers, especially if prices are going up without explanation. Instead, focus on adjusting your COGS behind the scenes — by negotiating better deals with suppliers, for example — to keep your prices stable while maintaining profitability.
That said, you may consider permanent markdowns for products that are being discontinued or phased out. But be cautious of how sales or promotions can affect your brand perception.
Set Pricing for Retailers
If you’re looking to sell your products in retail stores, be prepared to negotiate. Retailers expect margins of 50-70%, so it’s important to understand how this affects your pricing and profitability. For example, if your COGS is $50 and you want to sell your product for $100, but the retailer demands a 50% markup, you’ll need to ensure that your COGS stays under $20 to maintain a profitable margin.
Creating a financial model can help you navigate these conversations. This way, you’ll know your break-even points and how much room you have to negotiate without sacrificing profitability.
Quick tip: Don’t settle on unfavorable terms just to get into a retailer. Retail partnerships can be a great opportunity, but they should not come at the expense of your brand’s long-term viability.
Don’t Overlook Freight and Shipping Costs
One of the most common mistakes brands make, especially in their early stages, is forgetting to include freight and shipping costs in their COGS. Whether you’re sourcing materials internationally or shipping finished products to customers, freight costs add up quickly.
Shipping costs can also vary depending on regions or weight, especially in industries like beauty or skincare, where packaging can be heavy. Be sure to account for these fluctuations in your pricing, or you could find yourself absorbing costs that eat away at your margins.
Action step: Use platforms like Shopify to test shipping prices in different regions and adjust accordingly.
Factor in Promotional Strategies
If you’re selling through a retailer that runs frequent promotions or discounts, you’ll need to adjust your pricing to ensure you’re still profitable after markdowns. High-end brands may want to avoid promotional-heavy retailers to preserve their brand image and pricing integrity.
You should also be aware of policies like markdown allowance (MDA), where retailers expect brands to pay the difference when a product is marked down. Some retailers also require brands to cover return shipping costs (RTV). These are important factors to understand before signing any agreements, as they could significantly impact your profitability.
Balance Competitive Pricing with Value
Pricing competitively doesn’t always mean lowering your prices to match your competitors. Instead, focus on the value you provide. Your brand’s unique value proposition (UVP) — such as using high-quality, sustainable materials, or offering cruelty-free products — should be emphasized in your marketing to justify a higher price point.
Competitive analysis tip: Compare your brand with similar competitors, but be sure to highlight what sets you apart. If your products are more expensive, communicate why they’re worth it — whether it’s cleaner ingredients, better craftsmanship, or sustainability efforts.
When to Adjust Pricing
Adjusting prices too frequently can confuse and alienate customers. However, there are instances when a price change may be necessary, such as when inventory isn’t moving, or costs increase due to inflation or rising material costs.
Before adjusting prices, consider running promotions to gauge customer response. If discounts improve sales but full prices don’t, it may be time to reassess your pricing structure. However, if you’re cutting prices, ensure that you’re simultaneously reducing COGS through strategies like negotiating with manufacturers or bundling shipping to maintain profitability.
If raising prices is necessary, transparency is key. In today’s retail landscape, brands and founders often act as influencers or public figures. Brands should be honest with customers about why prices are increasing — whether due to rising production costs or maintaining quality. Customers are often more understanding than businesses realize, especially when brands communicate openly about their decisions.
Pricing for Wholesale vs. Direct-to-Consumer (D2C)
Pricing strategies for wholesale differ from those for direct-to-consumer sales. Wholesale pricing needs to factor in the retailer’s required margins, which typically range between 50-70%. Brands must create financial models that account for these margins and ensure their pricing can accommodate both wholesale and D2C models.
It’s advisable for brands to bake future wholesale pricing into their D2C pricing strategy from the beginning. This ensures that when they eventually expand into wholesale, they don’t lose profitability due to tight margins. If your wholesale pricing requires deep cuts to your margins, consider negotiating marketing support, deposits, or other assistance from the retailer to help offset production costs.
Navigating Wholesale Partnerships
Entering into wholesale partnerships can be intimidating, especially for new brands. While it may seem like an honor to be stocked at a prestigious retailer, no partnership is worth sacrificing profitability. Retailers often have expectations regarding marketing support, return policies, and markdowns that could impact a brand’s profitability.
Before signing any agreement, be sure to negotiate these terms upfront. Ask for marketing support, clarification on markdown policies, and details about return costs. Being transparent about your expectations and understanding the retailer’s policies will help you avoid surprises down the line.
Maintaining Profitability Amid Rising Costs
Increased production costs, whether from rising material prices or inflation, require brands to be agile and strategic. Brands should consider negotiating with suppliers, finding alternative ingredients or materials, and constantly evaluating their COGS to maintain profitability.
Moreover, brands should consider maintaining a core product line that delivers higher margins to offset more costly items. These “bread-and-butter” products can help stabilize profitability, especially during periods of fluctuating costs or market conditions.
Avoiding Common Pricing Pitfalls
One of the most common mistakes brands make, especially early on, is underpricing. While it may seem like a smart way to enter the market, pricing too low can lead to long-term struggles when overhead costs rise or as brands scale up.
Brands should be mindful of competitor analysis but avoid the trap of pricing too low to compete. Instead, emphasize the unique value propositions (UVP) that set their products apart. This is especially important when launching a new product. Brands need to ensure that their pricing reflects the value they bring, such as higher quality ingredients, superior craftsmanship, or sustainability.
Launch with the Right Pricing Strategy
Pricing strategy is crucial during a product launch, as first impressions matter. While being the cheapest option on the market might yield short-term sales, it’s rarely sustainable for smaller brands that don’t have the economies of scale larger brands enjoy. Instead, focus on creating a strong brand image that justifies a higher price point. Ensure that everything from your website to social media to customer service reinforces the value of your product.
Launching a product that is underpriced can create challenges down the road when production costs increase or if the brand wants to enter wholesale partnerships. It’s better to start with a pricing strategy that is sustainable and allows for healthy margins, even if it means a slower initial growth trajectory.