How To Determine The Price Of A Product? All About Product Pricing Methods.

. 12 min read
How To Determine The Price Of A Product? All About Product Pricing Methods.

Table of Contents:

1. Product Pricing Methods

2. Types Of Pricing Methods In Marketing

3. How To Determine The Price Of A Product?

4. Price Analysis In Different Methods Of Pricing?

5. Optional Product Pricing

6. FAQs On Product Pricing Methods In Marketing

1. Product Pricing Methods

Product pricing involves the process or methods applied by a company to fix and evaluate the prices and costs of their services and products. The prices should complement the present structure of the market and meet the requirements of the company. The objectives of product pricing strategies are survival in the market and eliminating the chance of getting ruled-out, ruling the market, expanding one’s profits, and developing a market for innovative ideas.

The Indian Pricing Summit is a meet of 500 to 1000 leading businessmen and stakeholders of business in India. The deliberate and decide, formulate and execute various product pricing methods. It helps them to grasp the changing value perceptions, evolving customer behavior, and to arrive at a proactive strategy or a plan.

2. Types Of Pricing Methods In Marketing

Based on various factors, product pricing methods can be classified and reclassified into a multitude of types. A few of the essential types of these strategies are listed below:

  1. Premium Pricing- The strategy of setting a higher price for a better quality product than one’s competitors to achieve a premium position.
  2. Penetration Pricing- This strategy is designed to earn more market shares by starting with a price lower than competitors. Startups in India often subscribe to this strategy to raise brand awareness and increase the accessibility of their products and hence, boost sales.
  3. Economic Pricing- This is a strategy to attract the price-sensitive chunk of society by keeping prices extremely low, just to cover the bare minimum. This is an important strategy for cottage industries and Startups in India.
  4. Customary Pricing- This method is usually used by chain stores, in this technique, prices are designed to complement the local situation. Very crucial to consider for Startups in India since Make in India gained momentum. This could boost business awareness in suburban areas.
  5. Skimming Pricing- Using this method, prices are adjusted depending on the newness of a product in the market.
  6. Neutral Strategy- This strategy encouraged marketers to keep the price of a product constant throughout its life in the market. It does not allow increasing market shares.
  7. Captive Product Pricing- This pricing strategy focuses on pricing products based on the features that make the product more captivating and draws the attention of customers.
  8. Optional Product Pricing- This method is meant for situations when a product or service comes with optional facilities besides the core service. Customers must pay to enjoy these optional perks.
  9. Bundling And Promotional Pricing- This strategy guides the combination of prices when two or more products are grouped to be sold together (for example, buy 2 get 1 free). This increases brand awareness as customers can buy multiple products without having to pay the full price.
  10. Geographical Pricing- This strategy guides marketers to price a product based on where it is being sold and is influenced by inflation and changes in the currency. India has gone through demonetisation and its economy is rapidly changing. This has harmed businesses, especially with a national level customer base.
Different Methods Of Pricing

3. How To Determine The Price Of A Product?

India is a developing country with a growing economy. The Make In India initiative encourages the production, trade, and use of products made in India to speed up the growth of the economy. Startups in India and industries must focus carefully on product pricing strategies. The diverse taste of the consumers, high competition, and the economic status ranges widely across the country need special analysis. The techniques or strategies applied by marketers to know how to determine product cost are mainly divided into two types by their orientation:

1- Cost Oriented

Marketers may want to experiment on how to find the product selling price. Cost orientation is used to find the cost of finished goods. This can be achieved  by cost-plus pricing. According to this, companies add their cost of producing sustained and include a certain percentage to it to get a selling price. Also can be used. In this, the fixed percentage is added to the end price of the product. Also target returning pricing can be used. In this, a company sets a particular selling price to obtain a particular amount of profit.

2- Market-Oriented

This category includes perceived value pricing in which the marketers price the goods based on how consumers approach the quality, advertisements, promotion, etc. of the product. It also includes value pricing in which a company offers good quality for lower prices. The going rate pricing, in which companies review the prices set by their competitors to decide their rate of a product, also falls in this category. It also includes the differential pricing method in which the cost of the products is different for different groups of customers. The auction type pricing which is a contemporary method blooming with the use of the internet and online websites is also an option.

To ensure the expansion of business, Product Pricing Methods are employed to ensure the fair selling of products. There is no hard and fast rule as to how to set that price of products but there are a lot of resources and product pricing strategies that help marketers determine product prices. The aim should be to create a data-backed pricing structure that involves a critical analysis of key points. It could be the relation between price and quality of the product, pinpointing the target customer, and tracking the number of and prices of the products of competitors.

4. Price Analysis In Different Methods Of Pricing?

1- Knowing One’s Business Priorities And Being Clear About Financial Goals

It has to be kept in mind that prices of products need to be adjusted so that on selling them enough revenue is generated to support one’s business.  It should not only suffice for covering costs but also should earn enough profit to expand one’s business. Besides, a product must gather maximum market shares, which shall increase the value of the product.

Marketers must understand the concepts of overpricing and underpricing. Making a product too costly or unaffordable for will lead customer traffic towards one’s competitors. However, charging too little for a product will make customers doubtful about its quality and prove disastrous for the marketer’s bottom line as well.

2- Gather More Market Share Through Flexible Pricing

The difference between what a customer pays and is willing to pay is called customer surplus. A strategic and gradual lowering of prices is a good way to find out the right price that attracts business. Along with this, one must know the base price and the revenue target. This price elasticity helps marketers to arrive at the right price for a product that is boosting their sales and earning them good revenue. One must remember to set a value-based price.

3- Being Aware Of One’s Competitors And Studying Where The Market Is Headed

Thorough knowledge of the quality and prices of same scale businesses gives an insight into the improvements and value points to add to one’s product quality. And the changes or adjustments to make in their prices to keep the consumer traffic consistent. Regional differences in prices can make big differences in business. The Indian economy is fast evolving (6% to 7% annually), and Startups in India need to tread carefully.

It is very crucial to note how much customers are willing to pay for one’s product and if the product is being highly, moderately, or not being sold in a market. Constant re-evaluation of one’s product prices is important. For example, according to the article Pricing for Growth and Profits by Graeme Deans and Satoshi Watanabe, a financial services company, with the right model can predict the cost of acquiring a new customer with 96% accuracy. They can screen customers and boost profits by 33%.

Optional Product Pricing

4- Calculations Are Important To Know Beforehand If The Prices Of The Product Drive Long Term Profit

Using a product based calculator and calculations based on prices of the current metrics is important. Using product-based analysis, overhead expenditure should be calculated every month. An accurate total will allow one to adjust prices proactively. Marketers should also know when to raise prices. After offering a special discount or service or free deliveries, the price can be raised. Raising prices on best sellers is also an option.

One must:

  1. Add up the variable cost for each product: This helps keep track of how much each product is costing the business and the total price of several similar products
  2. Add the profit margin: The next step is to decide how much percentage of profit one is aiming for.
  3. Considering fixed costs: Marketers must not overlook the fixed costs. This is a fixed amount of expense that brands pay. It is not affected by the number of products one aims to sell.

5- Taxes And Costs

The product pricing methods in use should be good enough to generate revenue to cover manufacturing costs, utilities, facilities, salaries of staff, packaging, supplying and shipping, website maintenance, and personal expenditure. The remaining amount from the revenue should be enough to invest in the business. Marketers must keep in mind that the Make in India initiative will hugely boost their business in the country. However, with the increase in income, there is a noticeable increase in income tax, and the dividend distribution tax levied in addition to it.

The present rate of DDT is 15%. Surcharge @ 12% and EC & SHEC @ 3% is also applicable on DDT. As companies escape payment of taxes, the minimum alternate tax is levied. Companies that pay less than 18.5% of their profits are susceptible to the payment of MAT. GST promotes one market, one Nation, one tax. And has worked mostly in favor of small or medium scale startups in India.

6- Setting The Wholesale Price Of Products

There is an external retail price that customers find when they decide to view products on a website. The wholesale price, however, is different, as it is shared in a line sheet from potential wholesale accounts. Wholesale means marketers are selling a higher number or quantity of products that help lower the price of the commodity. Once marketers know their retail price, they can move on with setting the wholesale price strategy. COGM(cost of manufactured goods): Material cost + labour cost + additional cost.

Profit and retail margin: Retail price - COGM/ Retail price. The only way to be sure of the perfect pricing strategy for one’s business, marketers must experiment and keep evolving. Not every strategy will fit any kind of retail business. Marketers are often faced with the question: how to determine total product cost. It is crucial to first understand how to determine unit product cost. Instead of having a black and white approach, brands and businesses need to try out, calculate, and try out various strategies depending on their product, aims, and level of business.

5. Optional Product Pricing

What is Optional Product Pricing or OPP? Optional product pricing is when a business sells a core product at a moderately low price, but sells other additional complimentary products at a higher price.

What is optional product pricing example?

If you consider the example of Airlines, where when you book an air ticket fair pricing is offered but when you select options like a Window Seat, Aisle, or a row of seats next to each other, the airline will charge you more for guaranteeing those options. This is the best example for optional product pricing.

Also read:
Price it Right! Best strategies to market your product.
Unique Packaging Ideas for Products: How impactful it is?

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6. FAQs On Product Pricing Methods In Marketing

Q. What are the different pricing techniques?

Ans- The different types of pricing techniques in the market are:

  1. Discount Pricing
  2. Psychological Pricing
  3. Economy Pricing
  4. Price Skimming
  5. Penetration Pricing
  6. Competitive Pricing
  7. Demand Pricing

Q. What are three kinds of pricing methods?

Ans- The 3 major pricing methods that work best for most businesses when preparing your pricing strategy are:

  • Value-Based Pricing
  • Competition-Based Pricing
  • Cost-Based Pricing

Q. What is the best pricing method?

Ans- Optional Product Pricing is meant for situations when a product or service comes with optional facilities besides the core service. Customers must pay to enjoy these optional perks. It gives the customer some privileges and also helps you earn some profits.

Q. Which pricing you can use for new product?

Ans- Price Skimming is the best pricing method you can use for a new product. Using this method, prices are adjusted depending on the newness of a product in the market.

Q. How to determine the price of a product?

Ans- The best methods to price your products are:

  • Understand the market
  • Choose the best pricing method that suits your business
  • Work on your financial management and cash flow
  • Acknowledge cost-plus pricing
  • Structure a value-based price
  • Consider all external factors
  • Stay Grounded

Q. What are the methods of pricing of a product?

Ans- These 4 pricing methods will help you determine just how much something is conceivably worthy to your shoppers:

  1. The Value Comparison Pricing Method
  2. The Discounted Cash Flow (DCF) / Net Present Value (NPV) Pricing Method
  3. The Market Comparison Pricing Method
  4. The Replacement Cost Method

Q. What are the methods of pricing?

Ans- The 4 types of pricing methods that work best are:

  • Competition-based pricing
  • Demand-based pricing
  • Markup pricing
  • Cost-based pricing

Q. Which are the best pricing methods in marketing?

Ans- The best pricing methods in marketing are:

  1. Optional Product Pricing
  2. Competitive Pricing
  3. Premium Pricing

Q. What are the 6 pricing strategies?

Ans- The top 6 strategies for pricing your products in the market:

  • Time-based pricing
  • Value-Based Pricing
  • Price Discrimination
  • Freemium
  • Penetration Pricing
  • Price Skimming

Ans- Costs are factual and call for management and understanding whereas prices are policies that are meant to attract customers. Costs and prices need not have a particular relation. However, marketers must keep in mind that customers are offered various options so prices should be set to make customers subscribe to their products or services.

Q. How Do Higher Or Lower Prices Impact Sales?

Ans- Experimenting with prices after detailed research of the prices offered by competitors is important. Guesswork must be avoided, and prices must be made to fluctuate only gradually. Experimentations should be for limited amounts of time and not on the entire customer base at the same time. Predicting impacts is difficult but a crucial step for better business.

Q. How To Review One’s Pricing?

Ans- Reviewing prices is important to keep market changes under surveillance. Marketers must never lose sight of the changes in the prices of their competitors and opportunities in the market to generate the desired profit. Review does not mean change. Price erosion should be avoided.