Best Tips on How to Price a Product Right
Pricing your product right is instrumental in deciding the success of your business. For most businesses, it is the final task of the product ideation and production journey, and unsurprisingly, the most daunting one. A low price might not be ideal, as the product might generate compounding sales without manifesting profitability for the owners. Conversely, a high price might attract fewer customers and consequently fewer sales. Therefore, knowing how to price a product the right way is invaluable for any business.
As a retailer, the way you price your product will tell a lot about who you are and what your business stands for. It is imperative to understand how to price a product for retail. Your price is an indirect, albeit ambiguous, representation of your company’s value proposition. Believe it or not, most customers see right through it. To understand how to price your product, you first need to understand more about pricing strategies.
The type of pricing strategy you adopt will directly influence your sales and analogous profit margins. It will also impact your cash flow, your budgeting framework, and essentially the expenses you can or cannot afford to bear.
Pricing can be extremely tricky since there is no correct method to lead with. One can be extremely careful and still end up choosing the wrong strategy. However, preparedness, thorough insight into customer patterns, and careful observations of customer behaviour can help make the right decision.
But you still need to start somewhere with a price that works. You need to know how to set your retail prices right. Always remember, the price you use to launch your product isn’t necessarily the price you end up with after successive hit-and-trial runs. Keep experimenting till you find the right fit.
The article that follows will cover in detail:
- The best pricing strategies to use for your product
- Fixing your pricing objectives
In understanding the common pricing strategies in the industry, there are three umbrella approaches to price your product:
- Cost-based pricing: This pricing model will help you understand how to calculate the selling price of a product. Conducting a rigorous cost analysis is important to ensure the optimum markup value for your product. Every cost analysis starts by calculating the price per unit of the product.
- Competitor-based pricing: This approach involves in-depth market research, aiming to understand your competitors’ prices and associated pricing models. Using these research values as a reference point, you price your product either higher or lower than your competitors based upon the value you provide to your customer at a price premium.
- Product range pricing: Product range pricing is a common technique where the product is offered at a lower price, incurring losses to the retailer, hoping to attract customers to purchase high-price products offered in the product line. You should know how to calculate the cost price of a product to leverage this approach.
Top 5 Pricing Strategies You Can Put to Action Today
The following five types of pricing strategies are not exhaustive, but they’re insightful enough to help you make an informed decision. It is imperative to understand that while one strategy might prove to be groundbreaking for one business, it might prove to be harmful to another.
A conscious understanding of customers and the market is invariably important to determine the right fit.
1. Cost-based / Markup-based pricing
To understand how to calculate product cost, you must have a greater understanding of the factors affecting your pricing strategy. Once you have figured out the cost, you must know how to calculate the selling price per unit of your product. You can start by figuring out:
- Cost of production
- Market demand for the product
- Markup value
First and foremost, we need to understand how to calculate product cost. The overall cost can be classified into fixed costs and variable costs. Fixed costs would include overheads, such as rent of manufacturing space. Variable costs may vary from business to business but, in the broader sense, include but are not limited to: production costs, raw material costs, freight costs, utility costs, labour costs, etc.
The following process elaborates on how to price a product calculation. Start by calculating the total cost.
- Total cost = Fixed cost + variable cost
Once the total cost has been calculated, the cost per production per unit (cost price per product) can be found easily by dividing it by the estimated total sales.
- Cost per unit = Total cost/ Estimated total sales
Finally, the business owner can decide on a markup percentage and use the following formula to get a good estimate of what the retail price might look like:
- Retail price = [(Cost per unit) / (100 - markup percentage)] * 100
2. Keystone pricing
This pricing strategy is a tricky one since the results are fairly subjective to the business segment. A common rule of thumb for keystone pricing is to double the wholesale cost of the product and sell it at that price to the consumer. Oftentimes this price is too low, and hence profit margins can be surprisingly bleak and unsustainable. In such a case, the retailer has to resort to a higher markup for better profitability.
3. Psychological pricing
Psychological pricing involves understanding the psyche of the customer and making informed decisions about the perceived value of the product according to the customer. Prices are set at a value that is perceived by the customer as fair and acceptable. Also commonly referred to as ‘charm pricing’, this proposition relies on the theory that customers tend to place significantly more trust in prices that end with odd numbers like 3, 5, and 7. Such kind of pricing can prove game-changing for brands that are trying to increase their sales volume.
4. Discount pricing
As is suggested in the name itself, discount pricing aims to lure in customers by reducing the price of some of its products, most often the hottest selling product the business offers. The product priced below its actual retail price is referred to as the ‘Loss Leader’.
True, the profit margin on the loss leader is close to zero, or at times even negative; however, the customer, once lured, can be enticed to buy other high-margin products. Such a mode of pricing can prove to be exponentially impactful if the right product mix is presented to the customer.
5. Dynamic Pricing
Dynamic pricing, also referred to as demand pricing, is a variable price-setting technique wherein the price of the product or service remains variable, dependent on the changes in market demand. Prices are subject to change on a daily, weekly, or monthly basis, based on fluctuations in market demand. This ensures that the price always maintains a direct correlation with the consumer’s purchasing habits.
Cementing your Pricing Objectives
The ultimate goal of any retailer or product manufacturer, for that matter, is to drive sales and sustainably generate considerable profits.
To price your retail product the right way, you need to follow a methodical approach, predicated on three insightful pillars:
Pillar 1: Asking the right questions
Efforts of finding and implementing the best pricing strategy work well only if the retailer considers some key factors instead of relying blindly on pricing strategies. The importance of a conscious understanding of one’s customers and the market in which they exist can’t be overstated. The most prolific way of understanding these key factors is by asking some rudimentary, yet profound, questions, such as:
- What is the mission of our brand?
- Who is our customer?
- Who are our competitors? How are they operating? What is their market share?
- What is our brand equity? How is our brand perceived in the market?
Pillar 2: Understanding your purpose
A sincere and honest understanding of these questions helps to realise which strategy fits best according to your needs, values, and mission. It helps you underline a holistic view of your current market and forecast trends to assume the best possible strategies to adapt according to changing market trends.
It is quintessential to understand what your business priorities are. You need to focus on your primary need for pricing the product, apart from just generating profits.
Pillar 3: Knowing your market inside out
What is it that you want your product to be known for? Do you want it to be known for its quality? Do you want it to be known for its efficacy or lifetime value? Questions like these help you understand your brand, your company, and most importantly, your product from a more native point of view rather than a profit-making machine.
It is undoubtedly hard to get the price right, but with consistent efforts and an insightful understanding of your brand and customer, you are one step closer. Always remember that setting the right price for your product could essentially make or break your business.
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Q. When should I review my pricing?
Ans. Several triggers can induce the need to check your current pricing and alter it according to the nature of the existing market. Some of the most common triggers can be:
- The threat of a new entrant with a competitive price
- Advancement in technology resulting in marginalised operating costs.
- Unexpected demand, allowing economies of scale to take control.
Q. How can I increase my prices without affecting customer churn?
Ans. The price increase should almost always be gradual. Have a strategy prepared to increase your prices, and do so sequentially and not drastically. As and when you increase your prices, providing a loyalty discount to your existing customers can prove to be advantageous.
Your increased price should reflect, almost intuitively, an increased perceived value of your product. Focus on increasing brand equity before increasing the price.
Q. How to approach a competitor who starts a price war?
Ans. It is important to react quickly in such situations. Understand that customers’ decisions are not solely based on pricing alone. Several other factors, such as convenience, service, etc., are equally important in their purchasing decisions.
Don’t make huge price cuts in response to a competitor’s pricing strategy. Instead, provide higher value to your customers in a cost-effective manner. Provide longer subscription times, lower service fees, free delivery on certain order values, or maybe even the opportunity to avail freebies for every purchase made.