A Product’s Price is a critical ingredient that dictates whether a customer buys your product. Now, how you set your price depends on your customer’s willingness and ability to pay, your cost, your brand perception, macroeconomic conditions and competitive dynamics. Based on our experience working with hundreds of retailers and brands across categories for over a decade, we’ve learned four strategies that help a retailer brand or manufacturer set their product’s market price to consistently and profitably win market share. We share them below.
Constantly changing economic conditions, government regulations and competitive changes add variability to your product’s prices. Internal factors such as cost of production and distribution, and external factors such as inflation, tariffs, new competition, changing demand trends and cost of borrowing have a significant impact. Manufacturers and retailers’ pricing decisions are based on these variables. In this article, we go into how these factors play a role.
1. Cost-based or Cost-plus based Pricing
This practice involves setting a product’s price based on the cost to manufacture and sell the product. This is a very popular pricing model used by brands and manufacturers. You add your desired profit margins after accounting for all manufacturing and production cost and come up with your product’s market price.
If you sell different sizes and colors, you may set the price for your parent SKU across all the child SKUs. Or, you may offer slightly different prices for each child SKU based on popularity and your sales velocity.
To use this model, add your profit margin on top of costs, cost of capital, and others. Then, based on demand, inventory and price elasticity, dynamically increase or decrease your market price to convert at the best margins yet gives you the sales velocity that you want.
Quick view
Stay Ahead with Price Intelligence by GrowByData
Optimize your pricing strategy with real-time competitor insights.
2. Competition-based or Market-based Pricing
Competition-based Pricing is all about monitoring your competitor prices and pricing competitively. This pricing strategy is based on tracking how your relevant competitors are pricing their inventory, and dynamically pricing to win the ecommerce sale. Retailers use this tactic to win the buy-box on Amazon, Walmart and other ecommerce sites. Most retailers constantly monitor competitor’s online sites, get SKU level prices or comparable prices, and apply their proprietary pricing algorithms on top of competitive pricing to price competitive and convert.
The strategy uses market pricing as a key signal. However, retailers don’t want to drop their market price to below their floor price and sell at a loss – unless the item is getting liquidating or sold as a loss leader to draw the shopper. So retailers put a limit on how low they will drop their price.
To implement this model, get your competitors’ price at a SKU level. If you have unique products, check the price of comparable products. You may be Nike and want to get the price of comparable shoes of the same size and use. You want to check pricing of products of brands such as New Balance, Hoka, Adidas and others as reference. You should use digital shelf to gain pricing insights on competitor’s merchandising to get market signals on the same SKU or comparable products, and correctly price.
If you are launching a new product, you use this technique also. You must understand how comparable brands are charging for the type of product you are selling. Understand who is showing up on the digital shelf on Google, Amazon and other relevant marketplaces for search terms that buyers search for when they purchase. See their pricing, promotions, shipping and others. Set your pricing according to what you see so you don’t price too high or leave money on the table.
3. Value based Dynamic Pricing
After understanding your competitive prices and adding minimum bounds based on your costs and margins, use additional product attributes to price for value. Incorporate signals such as competitors reviews, rankings, your brand perception, product inventory and demand fluctuation, your share of voice on organic search and advertising channels like Google, Amazon and Walmart to set your product pricing strategy and maximize sales at the highest margins.
Now these variables are always changing. Competitors are always adjusting. New competitors are emerging. Macro-economic conditions are in flux. You should incorporate all these signals holistically on and ongoing basis to craft your unique dynamic pricing strategy.
4. Product’s Price Elasticity based Pricing
Pricing lower than your competitors will not always give you best results. The right question is – how can you maximize profits while increasing your market share. To answer this, you must understand your product’s sales volume and profits at different prices. In other words, understand your product’s price elasticity (the relationship between change in quantity demanded and price).
For example, imagine you are experimenting with your price. You have 50 customers buying your product. You find that your revenue fluctuates at different prices as shown in the table below –
This suggests that $18.90 generates the highest revenue despite lower conversion than prices $8 and $13.5. To maximize revenue, you should set your product’s price at $18.90. However, if you want the higher conversion to generate volume (to clear inventory and other reasons), you set a lower price. This is the Discount Pricing strategy. With this loss-leader strategy, you can attract new customers who value lower prices. You can land and then expand by by upselling and cross-selling other products to these customers.
Price for Long Term Profit Maximization
With the above strategies, you know how to price your product for higher market share and profits. Other key factors you may consider are –
Raise the price of your top seller, offer seasonal discounts and run promotion campaigns.
Cross sell items with discounts. For example, if your customer bought a laptop, offer him/her a discount on laptop accessories.
Run smart marketing experiments aligned with your corporate strategy. This powers you to maintain market share with consistent profitability.
Generate enough free cash flow profits over cost of capital and keep you motivated in a sustainable manner.
Ultimately, Pricing is an art that incorporates creativity and meets your business objectives. It maximizes profits and allows you to have a sustainable business model. With these strategies, you should set your price based on what you believe your product is worth and what is best for your business. And, you must constantly keep a pulse on competition and reprice to optimize per your goals and changing market conditions.
GrowByData helps leading retailers and brands gain competitive price intelligence insights at a SKU level and at a comparable level to successfully price in eCommerce. Learn more about our state-of-the-art Competitive Pricing Intelligence Solution.
