How to Price a Product?

By GrowByData Content Team

| READ 5 MIN
TOPICS Blog, eCommerce, Marketplace
How should you price your product? Price your product using data - cost based, competition based and value based. GrowByData.

The Product’s Price is one of the most essential elements that dictate whether a customer will buy.

How you set this depends on your customer’s willingness and ability to pay, your cost and competitive dynamics.

Economic situations and market 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.

Based on our experience working with 100s of retailers and brands across categories, we believe that the following strategies will help a retailer and manufacturer set their product’s market price, and consistently and profitably win market share.

 

Price on your Product’s Base Price
Cost Pricing
Competitor Pricing
Dynamic Pricing

 

There are three ways to set your product’s market price –

1. Cost-based or Cost-plus pricing – calculate the total cost of your product and add a profit margin to determine the final price.

2. Competition or Market-oriented pricing – check the price of your competitors. Then set the price of your product lower, higher or the same, yet higher than your cost.

3. Dynamic Value-based pricing  – utilize multiple factors such as competitors’ pricing, competitors reviews,  your brand perception, availability of products and demand fluctuation.

 

Price on your product’s Price Elasticity

Pricing lower than your competitors will not always increase your overall revenue. The right question is – how can you maximize profits while increasing market share? To answer this, we 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 hypothetical 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 (for clearing 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 Business Profit 

With the above strategies, you know how to price your product and maximize market share and/or profits. A few other key points –

  • You must consistently maintain your market share to ensure consistent product profitability. For this, you must run nuanced marketing experiments and stay true to your personal and business goals.
  • 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. 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 retailers and brands collect high-quality market data utilizing algorithms and humans in the loop to give high-quality SKU level insights. We utilize market and client data to suggest market prices and enable customers to act on the insights to increase revenue and margins.

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