Four Proven Methods to Price a Product

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 and competitive dynamics. Based on our experience working with hundreds of retailers and brands across categories for over a decade, we’ve learned that 4 strategies help a retailer and manufacturer set their product’s market price to consistently and profitably win market share. We go into this below.

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. In this article, we go into how these factors play into pricing.

 

1. Cost-based or Cost-plus based Pricing

This practice involves setting cost or prices based on the cost of the products or goods that are being sold in the Market. Cost based pricing is a popular practice among brands and manufacturers.

Basically, the process involves addition of small profit percentage on the manufacturing or production cost.

As a manufacturer or reseller, calculate the cost of your product and add a profit margin to compute final price.

 

2. Competition or Market based Pricing

Competition Based Pricing is all about understanding and pricing versus your competitors. This pricing strategy is solely based on targeting your competitors and their strategy. The method uses the information from the Market rather than the product cost or consumer behavior.

To implement, check the price of your competitors. Then set the price of your product to be lower, higher or the same, yet higher than your cost.

 

3. Dynamic Value based Pricing

Utilize dimensions such as competitors’ pricing, competitors reviews,  your brand perception, availability of products, demand fluctuation and your appearance on organic search and ad channels like Google, Amazon and Walmart. Develop a dynamic pricing strategy from these variables for maximum sales and margins.

 

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, 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 Profit Maximization

With the above strategies, you know how to price your product and maximize market share and/or profits. Other key considerations for your pricing –

1. You must consistently maintain your market share for consistent product profitability. For this, you must run nuanced marketing experiments and stay true to your personal and business goals.
2. You must generate enough cash flow and profits to cover your expenses and keep yourself motivated to continue to grow.
3. You can raise the price of your top seller, offer seasonal discounts and run promotion campaigns.
4. 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 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. Happy to talk and help!