Thinking your product’s price is high or low, then you’re not alone. According to a study on Research Gate, a key and common issue organizations face when pricing a product is “price determinations that are too high or low.”
More so, having a hard time finding the sweet spot between not pricing a product too high and discouraging customers from buying or not pricing it too low and undervaluing the product?
In all honesty, product pricing can be a difficult task, however, employing the right pricing strategy and model that works for your business, you should find a suitable price that can make your product sales and profits skyrocket over time.
What Is Product Pricing?
Product pricing is determining the selling price for your product. The price of a product, considering the cost it takes to produce and sell it, and how much customers are willing to pay for the product are major factors that determine the price of your product.
Product pricing is done to ensure the value of the product you’re offering for sale in a market is seemingly equal to the cost to produce the product and consumer demand. To avoid losses when you sell, ensure your profits are high to be able to compete in a market while offering competitive prices for your products.
Why Do Products Need to Be Priced Effectively?
You should take pricing a product seriously and do it effectively because it is one of the most decisive factors that influence a customer’s purchasing behavior – whether they would buy your product or not. There are three aspects that customers pay the most attention to when assessing the price of your product, affordability and accessibility, perceived value and quality, and the prices of competitors.
In all, accurately pricing your product effectively, for one, provides value to customers, meaning, the product is beneficial to them, and it’s worth their money. And gives your company a competitive market advantage – earning a significant amount of revenue, more than your competitors.
How To Price Your Product?
The first thing to consider when choosing a price for your product is to calculate the cost it takes to produce per product and make it market-ready, then add your profit. More so, you should consider setting your product’s price relative to your competitor’s pricing.
For easier understanding, if it takes $1 to produce per product, and you intend to make a profit of another $1 or a profit margin of 100%, then your product’s price should be $2.
$1 + $(100% of 1) = $1 + $1 = $2
How To Calculate Product Pricing?
When setting your product’s price, you should consider factors, like market research and product positioning. With those factors, you get valuable insight on how to set your product’s base price. Even more, you can decide your pricing model if you charge recurring fees or subscriptions.
Listed below are major factors that can determine your product’s base price and profit margin:
1. Customers
You should determine and know what your customers want from your product and service. If they want a cheap product, or they want a one which would give them value. Also, if price has a great effect on their purchase decision.
Know what your customers want from your products. Do they want the cheapest price for the value they receive? What part does price play in their purchase decision? Lastly, ensure you’re selling to the right target audience. If you’re selling to the wrong audience, your sales might be low.
2. Positioning
With positioning, you understand if you want your brand to be premium or expensive, luxurious, high-end in your industry, the cheapest, or in the middle. Thereafter, you will select an ideal pricing.
3. Value proposition
Your value proposition is the unique benefit your product provides to your target customers, and this factor can heavily influence how well people purchase your product.
If your products offer customers a unique benefit or solve a unique problem, you can sell at a premium price. One is if your product is more durable or saves the customer money when using it, you can always sell at a higher price, compared to what your competitors are selling. To identify your value proposition, determine what sets your products apart from your competitors.
4. Product Type
Also, you should evaluate the product you sell and what current types of customers are buying. Is it a high – or low-end product? With that information, you get to determine the right price for your product.
Choosing a Pricing Strategy
There are lots of pricing strategies employed by businesses. The one you choose to use depends on the product you are selling and the industry you are in. Overall, here are different and common pricing strategies:
1. Cost-plus pricing
Many people might think this is the only pricing method, but that’s not the case. It’s one of the many pricing models and strategies. This pricing strategy involves adding all the costs to make a product ready for sale and adding a percentage margin to get your final price. Many companies and businesses use this method because it’s easy to price their product and save time when proving a product.
2. Competitive Pricing
Competitive pricing involves setting a price that’s relative to similar products sold by other companies alike. Usually choosing a lower price gives you a competitive advantage. This strategy is employed when a market is saturated with products sold by well well-established companies and businesses.
Examples of products sold by companies using this strategy are beer and household products. Again, businesses use this strategy when they sell a wide range of goods and intend to use one product as an incentive for customers to buy other products, the company offers.
3. Price Skimming
Price skimming is when you set the price of a new product high because of high demand by consumers, and then over time, lowering it. This pricing strategy works best when your product has a high demand, it’s innovative, or the rave of the moment – and you have no real competitor selling the same kind of product.
Products that you can sell using a price-skimming strategy are electronics. A typical example is a new Samsung smartphone sold at a premium price. Customers are willing to pay thousands of dollars for it – even when they know the price will eventually drop after a new version is released in a year or two.
4. Penetration Pricing
Penetration pricing is the opposite of price skimming. It’s a strategy used when a business or company intends to launch its product into a saturated market. Typically, they offer a product at a lower than market price to attract buyers and lure them away from buying competitors’ products – then gradually increase the price over time.
5. Value-Based Pricing
Value-based pricing is a pricing model, where factors like, how much value a customer derives from a product, what they want in the product, if it’s beneficial to them, and solves their problem. And also, how much they think the product is worth, will determine the price of the product. Other factors like the company’s costs or competitors’ prices, don’t affect the product’s price.
For example, Adobe, utilizes value-based pricing, by offering tiered subscription plans, where users can select one catering to their needs.
Choosing the Right Pricing Model That Works
When choosing a pricing model for your product, you have to choose one that has a beneficial impact on the value of your product, and more so, one when chosen can increase your revenue and profits. Also, you can experiment with different pricing models, by conducting live experiments, you can gather data on how different prices of your products can positively influence your revenue and profits – either it’s low or high.
You can introduce a product at different prices to customers in different markets to see how well they purchase it and how well it increases your profits. Then select a price that can increase your profits.
The most common pricing models are:
- Flat-rate pricing
- Pay-as-you-go pricing
- Tiered pricing
- Price per user
- Subscription/membership pricing
1. Flat Rate Pricing
Flat-rate pricing is sometimes called ‘fixed fee’ or ‘flat fee’ pricing. In this pricing model, fixed, variable, indirect, and direct costs are all added when calculating the final product price. When there are regular changes in costs or changes in the time it takes to complete a project, it doesn’t change or affect the final product price. Thus, the customer doesn’t pay more regardless.
2. Pay-as-you-go Pricing
This pricing model is mostly used by companies that offer cloud storage or mobile data services. For example, you pay based on the amount of data or storage you use. In this model, users pay based on the amount they consume.
3. Tiered Pricing
Tiered pricing offers customers a variety of prices, to choose from, each tier has certain features, benefits, or services. These tiers allow customers to choose the model that best suits their needs. The tiered pricing model is used by most software-as-a-service companies. The tiers that customers can choose from are of different levels, ranging from one to three or four. Which can include essential, standard, and premium pricing tiers.
4. Price Per User
Per-user pricing is a pricing model that is determined by the number of individual users. In turn, determining the total cost of a subscription package. It’s common in the SaaS industry, where customers pay a flat recurring fee for up to X amount of users and $Y for each additional user on the account. SalesForce, a cloud-based company, in the US, uses a price-per-user pricing strategy.
The formula for calculating this pricing model is:
Customer cost = number of users X cost per user
5. Subscription/Membership Pricing
Subscription pricing is a pricing model where customers pay a fee to access and use a product, usually a monthly fee. Membership pricing models can include different tiers, payment schedule options, and discounts.
For example, Grammarly uses a subscription-based pricing model that has tiers.
Best Product Pricing Practices
1. Conduct Market Research
When you understand your customer base, well enough, you understand what they want, and don’t. Even also, understand what your competitors are lacking in terms of product offering. When so, you better understand what price to set for your product.
2. Experiment With Pricing
You must experiment with different pricing models and strategies, especially when just starting your business for the first time. You have to use a sample size of customers, especially not usual customers, who buy from you. Then, you can increase your prices with time, so you get real information on how much customers are willing to pay.
3. Focus On Long-Term Business Profit
By focusing on creating a long-term business profit, you can easily evaluate Customer Lifetime Value(CLV). Which is the amount a customer is willing to pay for a product, during the entire time they have an average business relationship with you. CLV is a metric that can determine if a customer loves your product and the pricing.
When the sales for a product are low, determine your CLV and see if you’re targeting the wrong customer base, or maybe you should adjust your pricing.
In all, selecting a suitable price for your product might be a daunting task, especially when starting. But following the best pricing strategies above, you can set a reasonable price. You should understand the different pricing strategies used in your industry, compare your products to similar ones, and set a price.
Furthermore, do market research to understand what your customers need, in terms of product and price, and experiment with different prices and pricing strategies. Lastly, set a price that will increase your profit and not tank it. You should choose a suitable pricing model and strategy.
FAQ’s
1. Which is the best pricing strategy?
Most experts consider value-based pricing, the best pricing strategy. It’s selling your product based on what customers think your product is worth and how beneficial it is.
2. How do you create a winning pricing strategy?
You should understand your customers, see their wants and needs, and then use that data to offer them a good product and price.
3. Which pricing strategy is best for a new business?
Many experts consider penetration pricing as the best. It’s a strategy used by many startups. This approach is for those who want to quickly establish your business in an existing and saturated market, to win customers, and to gain market share.
4. What Is a Profit Strategy?
A profit strategy is a marketing approach that involves increasing profits by managing costs. Businesses in highly competitive markets, where margins are thin, and customers don’t like high prices, use a profit strategy.
5. How Much Profit Should You Make On A Product?
You can make about 10 percent of the price from each product you sell. Generally, a good profit margin will typically fall between 5% and 10%. Although this isn’t a definitive number.
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