Understanding how to price a product is a critical factor in deciding the success of your product or service, but it is often overlooked by eCommerce entrepreneurs and businesses. They accept the first price that comes to mind, copy rivals, or (worst of all) guess. Humans are unreasonable creatures. Pricing strategy for products is as much an art as it is a science. We'll be blitzing today.
There are several methods based on how to price your product when you sell online that is focused on human psychology research. Charm pricing is when you end your price with a 9 or a 5, for example. Millions of businesses have used charm pricing to price their products, and it has been proven to increase sales. Or there's "The Rule of 100," a brilliant psychological trick for increasing the perceived magnitude of your discount, regardless of its scale. Businesses follow The Rule of 100 by offering percentage discounts on goods under $100 and dollar discounts on items above $100. Without question, psychology plays a crucial role in determining how to price a product.
But first, let's look at experimental methods and techniques on the price for your product. To arrive at the best price for your goods, follow these steps.
Different Pricing Strategies
Thousands of entrepreneurs and decades of education have paved the way for new companies to develop a product pricing strategy that takes advantage of the most cutting-edge pricing options available.
Knowing which pricing models work best in your industry will make pricing a product much easier, and it can give you faith that you're not just guessing. The following sub-sections brief the various pricing strategies:
Cost-plus pricing is one of the most straightforward ways to price your product. Calculating the overall costs of making the commodity, and applying a percentage markup to calculate the final price, is what cost-based pricing entails.
Let's assume you've produced a product with the following costs:
Cost of materials = $20
$10 in labor costs
$8 in overhead
Total Expenses: $38
You then multiply the total costs by the margin percentage, say 50% (retail industry standard), to arrive at a final product price of $57.00 ($38 x 1.50). If you recall our "Charm Pricing" strategy from the beginning, you could price this item at $57.99.
This approach is easy to use and quick to implement in determining how to price a product, allowing you to easily add a profit margin to any product you wish to sell.
Business-oriented pricing, also known as a competition-based pricing approach, compares related goods (competition) in the market.
Depending on how well their own product matches up, the seller sets the price of a product higher or lower than their rivals.
- Price above market
This means pricing your product higher than your competition to establish a reputation for offering a higher-quality or better-performing item.
- Copy market
To maximize profit while remaining competitive, when it comes to how to price a product, here, you make sure to sell your item at the same price as your competitors.
- Priced below market
This means using data as a benchmark and purposefully underpricing a product to entice consumers to choose your store over theirs.
Each of the above market-oriented strategies has advantages and disadvantages. To correctly price your product using market-oriented pricing, you must first consider the costs of production as well as the quality relative to competitors.
- Dynamic Pricing
Dynamic pricing is a strategy on how to price a product and it is also known as demand pricing or time-dependent pricing. It is a business practice in which companies set variable product prices for a product or service based on current market demand. Dynamic pricing, in other words, is the act of adjusting a price several times during the day, week, or month to best-fit customer shopping patterns.
Dynamic pricing is used by more than just Uber to increase profits. For major eCommerce shopping days like Black Friday and Cyber Monday, Amazon has long used price increases on their most competitive products, for example. There are many excellent software products available that will allow you to apply dynamic methods on how to price a product automatically without breaking the bank or pulling your hair out.
Capture More Market Share By Experimenting With Pricing (AND UNDERSTANDING PRICE ELASTICITY)
Many companies fall into the pit of believing that lowering commodity prices would result in more sales and increased revenue. Lowering commodity costs strategically has advantages that can contribute to increased sales. For starters, it decreases the amount of money left on the table (consumer surplus) for consumers willing to purchase at different price points.
So, how do you increase profits while increasing market share? You must consider a product's market volume at various price points, as well as what helps you to stay profitable. To put it another way, you must comprehend price elasticity.
Make Sure Your Product Pricing Drives Long-term Business Profit
You should have a good idea of where you want to start with pricing your product at this stage. To ensure long-term product sustainability, you must examine your current market metrics and devise a strategy for continuing to experiment in the future.
Millions of businesses compete for the interest of consumers. One way to gain a competitive edge in this wild marketplace is to have a dynamic product pricing strategy — one that shifts with the demand while still allowing the company to stay profitable. Customers quitting your online shop because you failed to adapt and upgrade the value of your product is the last thing you want, and this is something you need to factor in when deciding how to price a product.
Tips On How To Price a Product Better
People will stop buying if you ask them to pay too much for your product or service. If you ask them to pay too little, your profit margin will suffer, and consumers will believe your product is of low quality. An 'optimal price' takes into account all of your expenses and maximizes your profit margins while remaining appealing to consumers. Here's how to figure out how much to charge.
- Know the Market
Understand the demand. You must determine how much consumers are willing to pay as well as what rivals are charging. Then you can decide whether you want to equal or beat them. However, in coming up with how to price a product, know that simply matching a price is risky; you must ensure that all of your expenses, both direct and indirect, are protected in coming up with how to price a product formula.
- Choose the Best Pricing Technique
Cost-plus pricing on how to price a product entails a percentage mark-up on prices, which varies by commodity, company, and industry. The amount of value your customers place on your product determines value-based pricing. Before you start calculating, figure out what your pricing plan is.
- Work Out Your Cost
Include all direct costs, such as money spent on product or service growth. Then figure out the variable costs (for things like supplies and materials, packaging, and so on) - the more you produce or sell, the higher they will be. Calculate how much of the fixed costs (such as rent, rates, and wages) the product can compensate. To get a unit break-even number, add all of these costs together and divide by volume.
- Consider Cost-plus Pricing
To your break-even point, you'll need to apply a margin or mark-up. Typically, this is calculated as a percentage of break-even. The level of mark-up will be determined by industry standards, experience, and business awareness. If the price seems to be too high, reduce the costs and the price accordingly. Be mindful of the drawbacks of cost-plus pricing, which is based on the premise that all units will be sold. Your profit will be smaller if you don't.
- Set a Value-based Price
To set a value-based price, you'll need a thorough understanding of your business. A hairdryer, for example, would cost £10 to bring to market. However, if this is the market value, you will be able to charge customers £25 for their services.
- Think About Other Factors
What effect will VAT charging have on price? Can you keep certain product margins down in order to generate higher-margin sales on others? You can need to figure out different rates for different territories, markets, or online sales. Do you need to budget for late payments from customers? Keep an eye on your cash flow and consider your payment terms.
- Stay On Your Toes
Prices are seldom set for an extended period of time. Since your expenses, buyers, and rivals are all subject to change, you'll need to adjust your prices to keep up with the demand. Keep an eye on what's going on and communicate with your customers on a regular basis to ensure that your rates stay competitive.
Simple Store From Strikingly
Time is money for business owners, and the pace is everything. Simple Store was created to simplify the usually complex process of opening a store so that you can concentrate on other aspects of growing your business.
To create a simple store with Strikingly, you need to first sign up with us. It requires your full name, password, and email address. Once done, click the “GET STARTED. IT’S FREE” button.
Once you have signup, you will be logged in automatically. Then you can click the “Build my Store” button to get started. This will take you to the template page, where you can choose the Shop template that suits you.
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After that, you can start editing. Add your product to the mix. Make a link to a payment processor. Begin sale. It's really that easy to create an eCommerce site.
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To begin, click on “Shop” to access your store and start adding new products.
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To add products, click on the “Add New Product” button at the top of the page. Users can list one product for free, five for limited users, and up to 300 for pro users per site.
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Fill in the title and summary of your product. It's best to keep the definition short and sweet. After that, you'll need to upload your product files. Choose a cover image and, if possible, rearrange the images.
Then, set your price - don't worry, if you're not selling in USD, you can change the currency in the PAYMENT panel.
Your store is now live after you've linked your payment gateway. You can always fiddle with your Store's settings and layouts, but you're ready to start accepting payments! Ready to create your own store? Create an account with Strikingly today.