Pricing your products correctly is a delicate balancing act. A low price isn't always the best option, as the product may generate a steady stream of sales without making a profit. Similarly, when a product has a high suggested retail price, a store may notice fewer sales and “price out” more budget-conscious buyers, resulting in a loss of market position.
Every little firm, in the end, will have to do their homework. Production and company costs, consumer trends, revenue targets, and competitive pricing are all elements that retailers must consider. Even yet, pricing a new product or even a current product line isn't merely a matter of numbers. This could be the most crucial component.
This is because numbers follow a logical pattern. Humans, on the other hand, can be a lot more complicated. Yes, you must perform the calculations. However, you must also take a second step that goes beyond analyzing data and calculating numbers.
The art of pricing necessitates calculating how much human behavior influences our perception of price.
To do so, you'll need to look at a variety of pricing strategies, their psychological effects on customers, and how to price your goods.
What is Retail List Price?
The retail price of a product is frequently a markup of the invoice cost. Keep in mind that the invoice price only reflects the amount paid by the retailer to the wholesaler. It excludes the additional costs of running a business and selling goods. The profit margin is calculated by adding a retail markup to the invoice price (the retail price) to account for the additional costs of doing business (i.e. rent and utilities).
Suggested Retail Price Vs. Retail List Price
The manufacturer suggested retail price, or MSRP, is used to promote more uniform pricing across stores where a product is sold by setting price points around how much the manufacturer proposes the product be sold for. If you're selling high-ticket items like vehicles, appliances, electronics, and luxury clothing, or reselling products at a discount, such as in a pawn shop, MSRP is the way to go.
The retail price is the price at which a manufacturer sells its items to wholesalers and retailers. On the other hand, the retail price includes a profit margin that accounts for selling costs that are not included in invoice pricing. If you're a product seller or producer, make sure to set a retail price that appropriately reflects the value of your goods.
Pricing Tactics to Bring New Clients to Your Business
There are lots of methods to price your items, and depending on the market you serve, you may find that some are more effective than others. Consider these five basic customer-attraction methods used by many new firms.
1. Suggested Retail Price Based on Competition
Images is taken from Singlegrain
This pricing approach focuses on a company's product or service's current market rate (or going rate); it ignores the cost of the product or consumer demand.
A competition-based pricing strategy, on the other hand, uses the prices of competitors as a standard. This suggested retail price may be appropriate for businesses that compete in a highly saturated market, where a small price difference may be the determining factor for clients.
With competition-based pricing, you can price your products slightly lower, the same as your competitors, or slightly higher than your competitors. If you sold marketing automation software, for example, and your competitors' costs ranged from $19.99 to $39.99 per month, you'd set a price somewhere in the middle.
Regardless of the price you choose, competitive pricing is one way to remain ahead of the competition and keep your pricing dynamic.
2. Cost-Plus Pricing
The cost of manufacturing your product or service, or COGS, is the main emphasis of a cost-plus pricing strategy. It's also known as markup pricing since companies use this strategy to "markup" their items according to how much profit they want to make.
To use the cost-plus method, double your product's production cost by a specified percentage. Let's imagine you were in the business of selling shoes. You want to generate a profit of $25 on each transaction because the shoes cost $25 to create. You would set a price of $50, which is a 100% markup.
Retailers who offer physical things generally use cost-plus pricing. This method isn't ideal for service-based or SaaS businesses because their products often provide significantly more value than the cost of development.
3. Keystone pricing
Images is taken from Oppbusinessloans
This is a simple pricing technique that retailers use as a guideline. To put it another way, it's when a retailer just doubles the wholesale cost of a product to get at the suggested retail price. There are a variety of instances in which keystone pricing results in a product price that is either too low, too high, or just right for your organization.
If you have products with a limited turnover, high shipping, and handling expenses, and are distinctive or scarce in any way, keystone pricing may be a mistake. In any of these scenarios, a retailer could undoubtedly boost the suggested retail price of these in-demand products by using a larger markup formula.
4. Dynamic Pricing Strategy
Dynamic pricing is sometimes known as surge pricing, demand pricing, or time-based pricing. It's a pricing approach in which the price changes in response to market and consumer demand.
Dynamic pricing is used by hotels, airlines, event venues, and utility businesses, which use algorithms that assess competition pricing, demand, and other factors. These algorithms allow businesses to adjust rates based on when and how much a customer is willing to pay at the precise moment they are ready to buy.
5. Subscription-based Pricing Strategy
Images is taken from Strikingly
Customers will pay you on a regular basis over a certain period of time if you use the subscription-based pricing model. When it comes to Subscription-Based pricing, you'll see that choosing to be a member for years will get you a discount. The longer you use a company's products, the less expensive they become.
This type of pricing approach is simple to put up with Strikingly's paid membership subscription function. You can create recurring revenue by creating one for your website. Make it clear to visitors how much value they will receive as a member, such as exclusive access to paid-only material and other benefits.
Images is taken from Strikingly
Not only that, but customers will be able to choose how much access they have to add features via membership tiers. When you pay more, you receive more, just like other corporations who use these suggested retail price tactics. This is one approach to increase your website's earnings.
Images is taken from Strikingly
This form demonstrates how to use the pricing table feature to make it easy for visitors to become premium subscribers. Customers only need to submit their name and email address to begin their membership, as shown in the image.
6. Skimming Pricing Strategy
Companies use a skimming pricing strategy when they charge the highest feasible price for a new product and then gradually drop the price when the product becomes less popular. The difference between skimming and high-low pricing is that the price is gradually reduced over time.
As technology devices become less important over time, such as DVD players, video game consoles, and cellphones, they are often priced following this technique. A skimming pricing approach can help recover sunk costs and sell things much beyond their novelty, but it can also irritate customers who paid full price and attract competitors who notice the "fake" pricing margin as prices are reduced.
7. Penetration Pricing Strategy
Images is taken from Wallstreetmojo
A penetration pricing strategy, as opposed to skimming pricing, is when a company enters the market with a very low price, thus diverting attention (and income) away from higher-priced competitors. Penetration pricing, on the other hand, isn't long-term sustainable and is usually only used for a limited time.
This suggested retail price technique is appropriate for firms that are just starting and looking for clients, or businesses that are breaking into a crowded industry. Disruption and temporary loss are fundamental to the plan and hoping that your first consumers will stick around as your prices rise.
8. Freemium Pricing Strategy
Freemium pricing, which is a combination of the words "free" and "premium," is when a company offers a basic version of its product in the hopes that users will eventually pay to upgrade or gain access to more features. Freemium is a price model used by SaaS and other software companies, as opposed to cost-plus. They select this technique because free trials and restricted memberships allow potential customers to get a taste of a software's full capability while also establishing trust before they buy.
Images is taken from Strikingly
With freemium, a business's prices must be based on the perceived worth of its goods. Strikingly's website building service is an example of a pricing plan. Along with other premium services, Strikingly offers a free basic plan. We know this is a fantastic price because after customers use our web builder service, they are more than delighted and want to keep using it with additional services like the Audience Plan for live chats, Domains for a custom address, and Custom Email for more professional-looking business emails.
Spotify, one of the most popular music streaming services, is another example of freemium pricing. You can listen to songs on Spotify's basic version (with ads playing regularly). Not only will the commercials disappear if you upgrade to Spotify Premium, but you'll also be able to create and save your own playlists, as well as play or shuffle music based on your preferences.
Choose the Best Suggested Retail Price Plan for Your Business
Let's look at how to choose one (or more, depending on your consumer groups) for your business now that we've looked at several pricing techniques.
• Pricing Starts with Your Clients
First and foremost, consider how your solutions provide value to customers. If the buyer considers the product to be of little value, an economy price or freemium plan may be the best method to entice them.
Also, figure out what kind of customer you want to attract, keeping in mind that not all customers are alike. If you're targeting other businesses as consumers, the value you provide will be more important to them than the suggested retail price. The price strategy in this scenario should be informed by your company's B2B sales activities.
• Know Who Your Competitors Are
Images is taken from Vpmarketinggroup
If you are one of many in a market, you must understand your competitors' pricing approach. If they're popular, you might have to cut your prices to break into the market, create a loyal customer base, and then make up for the lost revenues. However, keep in mind that this will take some time.
If you're the only or early participant in a segment, you can charge a high price at first and then lower it later. Skimming the suggested retail price is an excellent technique to advertise oneself as a valuable or exclusive brand.
How frequently do pricing in your industry change? What is the driving force behind this?
What is the profit and margin structure of your competitors?
Estimating this piece of data has a lot of ramifications. Is he more productive? If you start a price war, will he be able to keep it going? Or, if you make a price hike, will he support it?
Are the expenses of raw materials really high?
It doesn't matter if it's labor or parts and components/licenses. Are these prices fluctuating? What strategy do you have in place to anticipate changes in raw material costs, and how do you factor these into your pricing?
• Align Pricing Strategies with Corporate Goals
The goals of a pricing plan should be in line with the company's ambitions. This isn't to say that the best suggested retail price leads to the most sales. Growing market share, defining the company's brand (for example, as a low-price leader), or keeping competitors at bay are all possibilities.
• Experiment with Different Pricing Plans
You should go in with a plan to try an approach, then analyze the results using measurable key performance indicators (KPIs). This will allow you to keep experimenting and fine-tuning until your price aligns with both your company goals and your customers' willingness to pay.
It's easy to become lost in the details of pricing: competition, production expenses, client demand, industry needs, profit margins, and the list goes on and on. You don't have to master all of these things at once, thankfully.
Simply sit down, crunch some numbers (such as your COGS and profit targets), and determine what's most important to your company. Start with what you require, and this will assist you in determining the best suggested retail price plan to employ.
Above all, keep in mind that pricing is an iterative process. It's unlikely that you'll hit on the right pricing the first time; it might take a few tries (and a lot of studies), and that's fine.