A 5 Step Guide to Price your Product

You have newly launched your company and set up your online business on an eCommerce website. Now you need to set the price of your product correctly. Now that you are faced with a pricing conundrum, you consider your options: you can either decide on a price that you believe to be fair or you may imitate your rivals. Both of these tactics are unreasonable and can seriously hurt your company.

 

It is very easy to get stuck on pricing, especially if you are launching any new product. We will talk about a scientific approach to product pricing in this article, that can help you in pricing your products correctly.

 

Why is it important to follow the pricing strategy?

 

Humans are irrational and most of the decisions they take on a whim are emotion-driven. That is why the product pricing strategies are mostly based on human psychology.

 

For instance, if you are given the choice to choose between two of the same pair of trousers in a store, one priced at “$10” and the other priced at “$9.99”, you will be tempted to buy the one priced at $9.99. This method of pricing ending with a 9 or a 5 is known as Charm Pricing, and many brands have experienced an increase in sales after applying this strategy. This is why pricing strategies are very important for any business. 

 

The price of any product needs to sustain the business. It will be very challenging for a business to grow if they set their profit margin too high or too low. 

 

It should also be kept in mind that the pricing of a product is not something that you can do only once, you can change it anytime. It is best to launch the product with a starting price that you can calculate by adding up all the expenses involved and setting a profit margin for yourself. If required, you can change it anytime in the future.

 

How to price a product?

 

Here we have accumulated 5 simple steps that you have to keep in mind regarding the pricing of your products. 

 

These are:

 

• Study the market.

• Find a base price.

• Choose how your product would be sold.

• Understand your buyer personas.

• Monitor, experiment, and improve.

 

Let us now elaborate on all of these points to properly understand the art of pricing.

 

1. Study the Market:

 

It is crucial for any business to study the market before delving into the ventures. It should know about its competitors, target customers, and strategies associated with the concerned market. It provides a framework for newcomers to know what they are working around.

 

You should not just focus on matching your competitors or beating them, but understand that the pricing should focus on your targets for your business. 

 

For example, if you are trying to sell a good quality product, you cannot price it low, even if your competitor does so. This might make you miss out on potential profit. At the same time, if you target cost-conscious customers as your customer base, you cannot set your product price high. 

 

Customers would naturally expect products in your industry to be priced fairly, therefore you must live up to their expectations. If you intend to significantly alter your rates from those of your rivals, there must be a valid justification. Pricing an item low also might make your customers think that your product quality is low. 

 

2. Find a Base Price:

 

There are many factors that add on to make the price of any product. It is important to learn which pricing models work best in your industry to simplify the pricing of a product. You should at the very least make sure that the price you set covers all of your expenses, direct and indirect.

 

Direct expenses are frequently changeable; if you produce or sell more, they rise. For instance energy and raw materials needed in the production process, as well as additional manufacturing expenses like packaging and distribution

 

Typically, indirect expenses are fixed. These may consist of:

 

• The cost of producing a new good or service 

• The cost of employment

• The cost of normal operating expenses like rent and business rates

 

There are many pricing models that are available, strategized by top entrepreneurs and experts of the market, over decades. Here are some of them:

 

Cost-based pricing:

 

Cost-plus pricing is one of the most straightforward methods for setting a product's price. A percentage markup is added after totaling all the expenses involved in producing your goods to get at cost-based pricing.

 

For example, let us consider your product has been designed with the following expenses:

 

Raw materials: $50

Labor costs: $20

Transportation: $10

Overhead: $5

 

The total cost of the product is $85. Now after adding a markup percentage of say, 40%, to the total cost, the final product price becomes $119. Now, the brand can include the charm pricing technique and mark the product at $119.99.

 

This is one of the simplest methods of pricing and lets you add a profit margin to your product easily and quickly.

 

Market Based Pricing:

 

Market-oriented pricing, also known as a competition-based pricing approach, contrasts comparable items (competition) in the market. Depending on how closely their own product matches up, the seller sets the price either higher or cheaper than that of their competitors.

 

There are three strategies in this model:

 

• Price above market: Pricing your product consciously higher than the competition will help you position it as a superior product with better functionality.

 

• Copy market: To maximize profit while remaining competitive, sell your product for the same price as your rivals.

 

• Price below market: Knowingly undercutting competitors' prices while using data as a benchmark to draw people to your business instead of theirs.

 

In the market-oriented paradigm, each of the aforementioned tactics has benefits and drawbacks. When using market-oriented pricing, it's critical to comprehend the production expenses of your goods as well as its quality in comparison to the competition.

 

Dynamic Pricing:

 

Dynamic pricing, also known as demand pricing or time-based pricing, is a business technique where firms establish variable prices for a product or service depending on the demands of the current market. In order to better match customer buying patterns, dynamic pricing involves adjusting a price several times throughout the day, week, or month.

 

Dynamic pricing is used by more companies than only services like Uber to increase revenues. For years, Amazon has used price increases on its most competitive products during major eCommerce shopping days like Black Friday and Cyber Monday.

 

The price-tracking website camelcamelcamel analyzes prices for popular goods multiple times each day due to the rapid price changes on Amazon.

 

There are several excellent software programs available that can help you effortlessly apply dynamic pricing to your goods without going bankrupt or losing all of your hair.

 

Some of these include Profit Peak by Splitly, Quicklizard, and Omnia Retail. By focusing on particular margins, these tools let you establish precise price recommendations that will keep your eCommerce firm successful.

 

3. Choose how your product will be sold:

 

You will be selling directly to the customer if you intend to sell your goods online or via your own shop. If you sell your goods to a retailer, the retailer will use the cost plus pricing model to tack on costs to pay their own expenses.

 

If your product is already available in shops, the retailers won't like it if you offer cheaper costs online. One straightforward solution to this is to either increase the product's price on your own website (so that it matches the in-store retail price).

 

As an alternative, you might decide to limit your sales to brick and mortar businesses or direct to consumers. You often won't be able to do both at stores.

 

You will also have to decide what you are aiming for: high-end, middle-end, or low-end products. 

 

Various pricing convey various meanings about your good or service. Although a greater price could suggest that your product is of superior quality, it might deter clever bargain hunters or prospective buyers with low means.

 

Whether intentionally or unintentionally, lower pricing may suggest inferior quality, although cheap product prices frequently result in big sales volumes.

 

A reasonable price, on the other hand, denotes a trustworthy, standard item. This is applicable to some products (like food) and services (like auto repair). A mid-tier price structure, on the other hand, lacks both the substantial volume of the discount market and the large profit margins of the luxury market.

 

4. Understand your Buyer’s persona:

 

The final consumers of B2B SaaS products are frequently different from their buyers. They are managers, departmental leaders, and business executives instead. Finding out who these folks are and the most effective way to contact them will be your next step in determining how to price your items. 

 

Here are a few techniques for quantifying your buyer personas.

 

• Create a concept for your most significant characters. 

 

Create distinct personas for the three to five different categories of B2B buyers you want to reach next. These will vary according to the type of position held, the size of the organization, the sector, and the particular product feature that appeals to each character the most.

 

• Identify the information about each persona that you'll need. 

 

For instance, you should find out each persona's pricing sensitivity, spending limit, and willingness to pay. Additionally, you should determine which characteristics and value statements will be most appealing to these personas.

 

• Gather the data. 

 

Each of the buyer personas you've identified will be the subject of surveys and one-on-one interviews.

 

• Review the data. 

 

You will categorize and analyze the responses you've gleaned from your interviewees and survey respondents in this step. Your investigation should help you draw conclusions about the worth of your product to your personas and the price range at which they're willing to purchase it.

 

• Concentrate on the high-value personas. 

 

Finally, you'll take what you've learned and provide your marketing and sales teams the tools they need to target the buyer profiles most likely to convert to customers.

 

5. Monitor, Experiment, and Improve:

 

The majority of small company owners require some time to determine the actual market worth of their products or services. If you want to be successful in the long run, you must keep an eye on sales and determine whether the price you've set for your product is consistent with the price consumers are ready to pay. You might need to boost your rates if you're having trouble meeting demand.

 

If sales are weak, you might need to provide a sale price (or lower the standard retail price) in order to build a clientele. The most prosperous companies adapt well to market developments.

 

Generally speaking, cutting prices is not a smart strategy unless you are doing it deliberately to gain market share, have a product that is price sensitive, or if all of your rivals are also doing so. You need to study and understand what situation you need to do that, to generate traffic. 

 

You also need to remember other things. What effects would the introduction of VAT have on costs? Can you maintain moderate margins on some goods while achieving greater margin sales on others? Different pricing may need to be determined for various markets, regions, or online sales. Do you need to make provisions for potential consumer payment delays? Pay attention to your cash flow and take into account your payment conditions.

 

Pay attention to your clients; if you can consistently meet their wants while preserving the required cash flow, you can rely on your product having a long, lucrative lifetime.

 

Conclusion:

 

Do not delay opening your business out of concern that you will select the "wrong" pricing. Your business's pricing will constantly change, but as long as it generates a profit and covers your costs, you may test and tweak as you go. You may learn the fundamental stages of setting your product's pricing from this article.