What is pricing?
Pricing is the act of determining how much a product or service is worth. You want to make sure that you’re making a profit, but you also don’t want to price yourself out of the market. Pricing your products is a balancing act between making a profit and not pricing yourself out of the market. A product that is sold at a lower price might see a healthy stream of sales, but it might not make any profit.
A product with a high price may result in fewer sales for a retailer, who may then “price out” more budget-conscious customers and lose market positioning.
You need to find a pricing strategy that works for your business goals. When setting prices, retailers must take into account the cost of production, customer trends, desired revenue, funding availability, and the prices of similar products offered by competitors. It’s not just math to set a price for a new product, or an existing product line. The most straightforward step of the process may be that.
That’s because numbers behave in a logical way. People can be much more complex than animals. You should begin your pricing method with some key calculations. You also need to go beyond just relying on data and numbers to make decisions.
How to choose a pricing strategy
Understand costs
To come up with your product pricing strategy, you’ll need to add up the costs involved in making and selling your product. The amount each unit costs you is your cost of goods sold.
If you create products, you’ll need to determine the overall cost of your work. How much does a bundle of raw materials cost? How many products can you make from it? You should also consider the amount of time you spend on your business.
Some costs you may incur are:
- Cost of goods sold (COGS)
- Production time
- Packaging
- Promotional materials
- Shipping
- Short-term costs like loan repayments
The pricing for your product will take into account these costs to make your business profitable.
Define your commercial objective
Your commercial objective is your company’s pricing guide. This will assist you in making any pricing decisions and ensure you are heading in the correct direction. What is the goal you want to achieve with this product? Would I like to work for a luxury retailer such as Snowpeak or Gucci? Do I want to create a brand that is chic and fashionable like Anthropologie? Make sure to keep this objective in mind as you determine your pricing. This will help you ensure that your prices are in line with your goals.
Identify your customers
This step is parallel to the previous one. You should have two goals when it comes to pricing your product: a profit margin that works for you, and a price that your target market is willing to pay. all your hard work will be for nothing if you don’t have potential customers
Consider the disposable income your customers have. Some people may be more willing to spend more money on clothing, while others may be more willing to spend less.
Find your value proposition
What makes your business genuinely different? To be successful, you need to find a pricing strategy that makes you different from your competitors while still providing good value to customers.
For example, Tuft & Needle, a direct-to-consumer mattress brand, offers high-quality mattresses at an affordable price. Its affordable prices have helped it become a known brand because it was able to fill a gap in the mattress market.
What to think about when making pricing decisions?
The price of your product or service is a key marketing decision that affects your company’s overall performance. You need to first decide your objectives when you are about to set your prices. They could be:
- Maximize profits
- Get cash-flow
- Get a return on investment
- Increase market share or sales volume
- Create an image
- Improve customer relationships
Each of these objectives asks for different strategies. To improve your customer relationship you have to play with promotions and deals, to maximize profits you would need to find the most efficient price level, and to increase market share you should apply a lower pricing than your competitors.
Once you have decided your objective, you need to see different pricing approaches.
The two main factors that affect pricing
The company’s pricing is based on two main factors: the company itself and the market.
Can you elaborate on what you mean by “company factor?” company culture is commonly forgotten when Costs, product characteristics, and other things are being considered.
Many companies use this factor exclusively to set their prices. Although 55% of respondents in a PROS and European Pricing Platform (EPP) survey said that pricing maturity is a competitive advantage, only 5% said they use advanced pricing practices in their companies.
The best-known way of pricing using this method is cost-based pricing. Prisync’s experience and the results of the aforementioned survey suggest that price matching is the most commonly used pricing strategy among e-commerce businesses. This is probably because they are better at measuring, controlling, and knowing their own data than data from outside the company.
What is cost-based pricing?
In simple terms, we can define it as measuring the costs associated with the product production or acquisition and then applying a profit margin to them. This strategy is effective for achieving the third objective: to get a return on investment.
This pricing scheme has its complications, though. Although the price you paid is part of the equation when considering acquisition or production costs, there are other factors to consider as well. You also need to add indirect costs . For example, you have to include the salary of your secretary who answers phone calls from customers and suppliers. The percentage of a product that is directly related to the specific product.
What the market has to say about the cost-based pricing approach
The cost-based pricing approach has a great attractiveness because of two powerful reasons:
- You have all the information needed in your company accountability books.
- It is rational and objective.
Sadly, this doesn’t mean that it is good. A key drawback to this approach is that it ignores what your competitors are up to. This is something your customers will definitely do. Price comparison engines are a great way for customers to check the prices of hundreds or even thousands of online businesses. Recent research shows that
- 67% of Americans say they will buy products from different e-commerce websites to get the lowest price and
- 72% say that in the last year they were attracted to buy from new websites they hadn’t used before by promotions.
This means that you need to look at what your competitors are doing in terms of pricing in order to make sure that you are competitive.
Some approaches that have competitors in mind to set pricing
See what you can do to incorporate your competitor’s activities when making decisions about pricing.
Price skimming: higher, short-term profits
An ecommerce business using a price skimming strategy would charge the highest initial price that customers would be willing to pay, and then lower the price over time. As businesses satisfy the demands of their first customers and more competitors enter the market, businesses can lower prices to attract a new customer base that is more price-conscious.
The goal is to increase revenue while demand is high and competition is low. Apple prices its products in a way that covers the development costs of those products. For example, the iPhone required a lot of development and thus its price is high.
Skimming is useful under the following conditions:
- There are enough prospective buyers that will buy the new product at a high price.
- The high price doesn’t attract competitors.
- Lowering the price only has a small impact on profitability and reducing unit costs.
- The high price is seen as exclusive and high quality.
Price skimming also works when there is product scarcity. This is an example of how products that are in high demand and have low supply can be priced higher, and as the supply increases, the prices will go down.
- Pros: Price skimming can lead to high short-term profits when launching a new, innovative product. If you have a prestigious brand image, skimming also helps maintain it and attract loyal customers that want to be the first to get access/have an exclusive experience.
- Cons: Price skimming isn’t the best strategy in crowded markets unless you have some truly incredible features no other brand can mimic. It also attracts competition and can bother early adopters if you slash the price too soon or too much after launch.
Competitors’ assortment
We will be changing our prices according to how available the product is in each moment, rather than how long it has been on the market. This strategy is good for achieving the objective of maximizing profits, as well as for increasing market share or sales volume.
How can you measure the availability of a product? The answer is technology. There are price tracking softwares that allow you to monitor stock availability.
You can charge more for your product when the market is running low, and charge less when there is an abundance of product. However, many business owners are unwilling to raise the prices. If this is the case for you, you may want to make the opposite decision. If you’re struggling to sell your product, offer a discount and advertise it well. If you use the following tips, you will improve your chances of appearing in the top results of a price comparison engine, which could result in more traffic and sales.
Competitors’ prices
If you use a competitor price tracking software, you can set your prices in relation to your competitors’ prices. Here you have two options:
Price lining
In this option, you have to decide which market you want to be in. Do you want to be at the bottom of the price range or the top? The main point is that all your products will have the same price range. If you want to be the best offer in category A, you will also have to be the best offer in other categories.
The plus side to this is that you can overall market your label. An example of a low pricing strategy would be something like Media Markt’s “Hey, I’m not stupid” campaign.
Each product with its specificities
An alternative approach is to tailor the strategy to each individual product. If you want to attract customers, you may want to set low prices for some key products and higher prices for other products.
Most companies use a combination of pricing lining for key categories and developing different strategies for the rest of the product offer.
Pricing to improve the relationship with your customers
Let’s go with objective number 6: Improve customer relationships. People love to feel special, so if you offer them a customized product, they will like you more.
Customer loyalty programs and personalized deals are a great way to improve your relationship with your customers. Thanks to internet cookies, you can do a lot of things with the great power of remarketing. Here you have some examples:
- Have you experienced the bad feeling of a customer abandoning your shopping cart? Send him an email with a deal for the specific products he had in the cart when he left.
- Have you noticed that your competitors raised their prices? Let your customers know it, and show them you are offering the best buying opportunity.
- Offering the best prices and discounts for returning customers will show them you value your relationship and will entice them to buy more.
Pricing to create an image
Lastly, we have objective 5: create an image. If you are a luxury brand, you can’t discount your prices or make deals. You have to make your product’s price give value to your product. A premium price tag will communicate to customers that the brand is trustworthy and high quality, though only a small portion of the market will actually purchase the product.
Even though you may not be planning to compete with others, you should still be aware of what they are doing. If you are a high-priced brand, you need to know how high your prices can be without losing your premium customers. Even rich people don’t like to feel cheated.
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