A Product’s Price is one of the most essential elements that dictates whether a customer buys your product. How you set your price depends on your customer’s willingness and ability to pay, your cost, 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 discuss this 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, competition, demand, and macroeconomic trends can have a significant impact. In order to earn a good Return on Investment, the manufacturer and retailers’ pricing decisions are based on these variables. In this article, we go into how these factors play a role in a product’s SKU level pricing.
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.
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You add your desired profit margins on the manufacturing or production cost to come up with the market price. If you sell different sizes and colors, you may set the same price for your parent SKU and fix the same price for all child SKUs. Or, you may offer slightly different prices for the child SKUs based on popularity and your sales velocity.
To use this model as a manufacturer or a reseller or a wholesaler, calculate the cost of your product and add a profit margin to finalize your market price. Based on demand, inventory and price elasticity, you may dynamically increase or decrease your market price to sell at the best margins.
2. Competition-based or Market-based Pricing
Competition-based Pricing is all about monitoring your competitor price and pricing competitively versus your competitors. This pricing strategy is solely based on tracking how your relevant competitors are pricing, market inventory, and dynamically pricing to win the sale. This is a tactic retailers use to win the buy-box on Amazon. Many retailers constantly monitor competitor’s online sites, extract SKU level prices or comparable prices, and apply their proprietary pricing algorithms to appear competitive and convert.
The pricing method uses market pricing as a key signal on top of product cost. Now, retailers also put a limit on how low they will set the price. You don’t want to sell below your floor price so this stop-gap is placed.
To implement this pricing model, check the price of your competitors at a SKU level. If you have unique products, check the price of comparable products. You may be Nike and you want to check the price of comparable shoes of the same size and use as sold by New Balance, Hoka, Adidas and others as reference. Use the digital shelf to gain pricing insights on competitor’s merchandising, to correctly set your price.
3. Dynamic Pricing
After understanding your competitive prices and putting in the minimum bounds based on your costs and margins, use additional product attributes such as competitors reviews, rankings, your brand perception, product inventory, market sentiment and demand fluctuation, your share of voice on organic search and ad channels like Google, Amazon and Walmart. With these dimensions, set a price based on your corporate pricing strategy, and maximize sales at the highest margins.
These product variables are always changing. Competitors are always adjusting. New competitors are emerging. Macro-economic conditions are in flux. Brands utilize these and craft their unique dynamic pricing strategy.
4. Product’s Price Elasticity based Pricing
Pricing lower than your competitors will not always increase your overall revenue. 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 change).
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 draw new customers who value lower prices. You can make up 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 and maximize market share and profits. Other key considerations for your pricing are –
You must consistently maintain your market share for consistent profitability. For this, you must run smart marketing experiments and stay aligned to your corporate strategy.
You must generate enough cash flow and profits to cover your expenses and keep yourself motivated to continue to grow.
You can raise the price of your top seller, offer seasonal discounts and run promotion campaigns.
You can offer cross seller items with a discount to a customer who has previously bought a certain item. For example, if your customer bought a laptop, you can offer him/her a discount on laptop accessories.
Ultimately, Pricing is an art that incorporates creativity and must meet 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 iterate so you are optimizing for your goals.
GrowByData helps leading retailers and brands gain competitive price intelligence insights at a SKU level to help unlock their eCommerce success. Learn more about our state-of-the-art Competitive Pricing Intelligence Solution, and drop us a line.
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