Product pricing is one of the key elements in starting an e-commerce business. The price of your products has more impact on your customers than you may think. Yet, don’t worry if you don’t know the formula to price a product, this post will walk you through how to price a product properly.
Consider These Factors Before Pricing Your Product
Before knowing how to determine a price for a product, you must keep in mind several factors, from whether you are selling online or in person, to whether you provide services or physical goods.
Then think about where you want your business to be on the market, the actual cost you spend on manufacturing or offering your services.
Ask yourself these questions to have a clearer idea of what you should take into consideration:
- Who are your customers?
- What are your costs?
- What is your revenue target?
- Who are your competitors?
- Where is the market headed?
What Are Basic Pricing Methods You Should Know?
There are a variety of pricing methods that you can use, including:
- Cost-based pricing/markup pricing
- Competitors-based pricing
- Time-based pricing/demand pricing
- Target costing
- Value-based pricing
- Penetration Pricing
1. Cost-based pricing/markup pricing
This method is pretty easy to apply. You need to add the costs to make the products to the amount of profit you want in dollars or a percentage of the final price.
Final Price = Cost + Profit/Markup
For example, if it costs you $100 to make the product, and you want to make $50 for every product you sell, your final selling price will be $150. The profit margin is 33,33%.
2. Competitors-based pricing
The name of this method says it all. Competitors-based pricing involves researching the price of your competitors and then determining the price of a product just below them.
For example, if you are trying to sell beef, and your competitors sell their beef for $20 for a kilogram, your price can be lower than that.
While it is crucial to examine your competitors to determine a price for a product, you still need to make sure that your profit margin is in an acceptable range.
3. Time-based pricing/demand pricing
Time-based pricing is also known as dynamic pricing, a unique pricing strategy in which your product will have a flexible price based on the demand of the current market.
In other words, time-based pricing means changing the price of a product multiple times to fit the consumer’s purchasing habits.
4. Target costing
Target costing is a pricing strategy in which the price is determined by the market conditions and other factors, such as the type of product, the number of competitors, and no or low switching costs for the end-users.
For instance, if you are trying to sell jeans, and the average market price is $50, here is how you can calculate your target price:
Average market price: $50
Target margin: 40%
Target cost: $20
So if your target margin is 40%, the maximum amount of money you can use to produce a product is $20. If it costs you more than $20 to manufacture a pair of jeans, your target margin will be decreased.
5. Value-based pricing
Value-based pricing is different from those above because it considers your customers. Value-based pricing looks into how much your customers are willing to pay for your product, or in other words, it is setting up the price for your product based on how much value can deliver to your customers.
If you can highlight how your product offers significant benefits, you can charge higher, and your customers will be more willing to pay.
6. Penetration pricing
Using this method, a business will enter the market with a lower price than its competitors or the usual product price. Doing this will help new companies attract many customers.
Over time, when the business has established customer loyalty, it slowly raises the price of its products.
How To Price A Product In 5 Steps?
Step 1: Research the market
If you are about to introduce a new product to the market, you will need to study the price points of similar products. If you intend to put a significantly different price from your competitors, come up with a good reason why you do so.
Step 2: Assess your total cost
You need to cover all the costs involved in producing and introducing your product to the market, both fixed and variable costs.
For example, estate renting or website hosting and taxes are fixed costs that stay the same and must be covered. Variable costs, composed of labor costs and material costs, differ from time to time depending on the quantity you produce. Combine all these costs, and you will have your total cost to release your product into the market.
Step 3: Choose the right pricing strategy
With the details on each pricing method provided above, you need to examine and decide which pricing strategy would fit your business and your products’ features.
Step 4: Know your target customers
The price of your products tells a lot about your brand and targeted customers. For example, a higher product cost may mean higher product value, so it’s more for customers with good incomes. In contrast, a lower price may indicate lower quality, but it often gains more sales.
Therefore, it is crucial that you choose which type of customers you target before pricing your product.
Step 5: Assess over progress and learn
To run your e-commerce business successfully, you will need to analyze your sales and see if the price you’ve set for your product aligns with the amount of money your customers are willing to spend.
If there are many demands for a specific product, you will have a reason to raise the price. If there is one product that doesn’t get many orders, you can offer a sales price.
Determining the price for a product takes you a lot of time and effort to think, plan and research, but if you follow the steps above on how to price a product, you won’t find it hard to find the ideal price points for your product.
And don’t forget to pay attention to your customers and other factors while setting a price for a product because the most successful business is the one that keeps its customers in mind and responds readily to the market trends.