Finding the right price for your products and services can be a hard task. So you need to know what is a pricing strategy about and how you can price your physical and digital products.
What is a pricing strategy?
There are many potential pricing strategies businesses can use. But there is no definitive method that you can use whenever you want to price a product. Any “formula” you want to use will be determined by several factors, including the industry, business size, structure, and your broader business model.
Still, you can find a few elements that are consistently used to price most products. Those components have a place in almost every pricing formula.
1. Understand the fixed and variable costs.
The cost might be the most fundamental factor in pricing a product. No matter the industry, trends, or competition your products have, your objective is to make money. To do that, you need to know what costs you have when you produce your product.
Consider your variable cost that changes with your level of output. Often it includes the price of packaging, raw materials, or shipping. Also, look for the time you spend on producing the product or service because time is money, and you need to know how much yours is worth.
Remember, your fixed costs remain the same no matter what your volume of production is. There is also the rent of facility and business permits and the fixed employee salaries.
When you take all these costs together, you can figure out what producing your product costs on a monthly and yearly basis. It helps you to understand what it takes to make a profit consistently.
2. Learn about your industry and competition
Research what people are willing to pay for comparable products and use the industry standards as a reference point.
It takes critical thought and self-awareness to identify what differences your product has from your competition. Use these factors to make your price.
When you want to sell at a higher price point, you need to be prepared to convince customers that your product offers enough value to be worth the price. Indifference: You should show prospects that you still sell a quality product with enough value, even if it is a lower-priced product.
If you believe you can use this kind of selling point, you can lower or higher the price in comparison to your competitors. It is important to understand where your product stands in its space. So take the time and effort to determine your and the competition’s approach.
3. Get to know who buys from you
Every product or service has its own target market. With specific buyer personas, you can find the people who want to buy your offer. These personas show your different interests, values, backgrounds, and purchase behaviors. When you learn about the people who are interested in your product, you can use it for your pricing strategy.
With surveys, customer interviews, and social media, you can get a better picture of these potential clients.
Will they pay more for premium quality? Or are they looking for cheap deals? Will they be loyal to your brand?
It will take time and a lot of trial and error to define buyer personas you can use for your pricing strategy. As long as you stick with it, you can find the optimal price point for your product.
4. Identify a profit and revenue target
The most important factor in pricing a product is to figure out how you make a profit. After you researched your competition, found your place in your industry, and know who you are selling to, you need to develop an ideal profit margin for your business.
It is a tough process to choose a ground and realistic figure that still allows you to operate, expand and make a profit. A margin is something you are both satisfied with and you are able to reach.
When you have figured it out, you can add your estimated fixed costs and variable cost, and you have a revenue target. If you have the target, it’s relatively easy to see how it fits the overall pricing equation.
Estimate the number of product units you believe you will sell and ship over the next year. Take your annual revenue target and divide it by that number. It gives you a rough picture of what you care for your product.
5. Be ready to do trial and error
There is no exact science to find the perfect pricing strategy. So you shouldn’t be hesitant to change the price if it is not working for you.
You need to ensure you consistently get profit to cover your expense. Make some tweaks, and you will eventually find the optimal price point. Also, external factors can force you to change prices.
This could include the volume of the product you can ship, the competitor prices, the efficiency of your marketing efforts, and how people see your product and brand.
It takes time and testing to get it right, and you might need to adjust it consistently.
What are some common pricing strategies?
Some common pricing strategies include:
- Penetration pricing: Setting a low initial price to gain market share.
- Price skimming: Setting a high initial price for a product and gradually lowering it over time.
- Value-based pricing: Setting prices based on the perceived value of the product to the customer.
- Dynamic pricing: Adjusting prices in real-time based on market conditions, demand, and other factors.
- Premium pricing: Setting a high price to position the product as exclusive or of high quality.
- Economy pricing: Setting a low price to attract cost-conscious customers.
- High-low pricing: Offering regular discounts or promotions to create a sense of urgency and encourage sales.
- Cost-plus pricing: Adding a markup to the cost of production to determine the price.
How to price a physical Product?
You can find a variety of methods to price your physical products. To find the best pricing method for your business, you need to keep in mind the industry, market conditions, and product type. Here are some of the most common retail pricing methods.
1. Markup Pricing
Markup pricing or cost-plus pricing is a simple method where a fixed percentage is added on top of production cost for one product unit. Retail sellers often use it.
2. Keystone Pricing
With keystone pricing, you sell your product at double the cost of goods sold. While it is a simple pricing method, it depends on what type of product you sell because the price might be too high for the value a customer expects from the product.
3. Penetration Pricing
The penetration pricing strategy is used by new companies that just entered the market and sold their product at extremely low prices. The goal is to compete with businesses in the market and give customers a much lower price than the competition.
How to price digital products?
There are some common pricing methods for digital products, especially software products.
1. Flat Rate Pricing
Flat-rate pricing is the most straightforward method. You charge a single price for your solution. It is mostly used by SaaS (Software as a Service) Products with a single set of features.
The pricing model is a simple-to-communicate method and also easy to understand for customers. But flat pricing can interfere with attracting a wider range of customers and provide them more value.
2. Per-User Pricing
Per-user pricing is a popular strategy where it leverages multi-users within an organization. The plan that follows that pricing method features price hikes based on how many individuals are within a company that uses the product.
It is a straightforward and simple pricing structure. The model allows you to scale, so more users will generate more revenue.
Sill charging per user, some businesses will find ways to trick your system so that not every user has to pay. Also, when there are too many user volume needs, and it hits a critical point, the solution might not be as financially valuable for other businesses anymore. It might lead to the company looking for other options with different pricing structures.
3. Tiered Pricing
With tiered pricing, you can offer multiple pricing options with a variety of available features and functionalities. It suits different clients with various needs and budgets.
The pricing method gives you an effective ability to reach a large number of diverse customers. You need a solid understanding of buyer personas and consider clients interested on a personal level.
The problem is that some companies struggle to create distinct enough options to capitalize on unique customer preferences. Also, having too many options might be confusing and overwhelming, which can hurt your profits.
How to calculate product prices?
In three steps, you can calculate a sustainable price for your product.
1. Variable costs per product
You need to understand all the costs involved when you ship and sell your products.
When you only order products and resell them, you already know how much each unit costs. This is your cost of goods sold.
If you make your own product, you need to calculate the costs of raw materials. The question is how much bundles of material cost and what number of products you can produce from it. It gives a rough estimate of your cost of goods sold.
But don’t forget the time you spend making these valuables. Set an hourly rate you want to earn from your business and divide that by how many products you can make in the time. Then incorporate the cost of your time as variable product cost.
Example calculations for each product.
| Cost of goods sold | $3.75 |
| Production time | $2.00 |
| Packaging | $1.68 |
| Promotional materials | $0.25 |
| Shipping | $4.50 |
| Affiliate commissions | $2.00 |
| Total per-product cost | $14.18 |
2. Add a profit margin
When you get the total number of variable costs per product sold, you can build the profit into your price.
For example, you want to earn 20% profit on your products on top of your variable cost. You need to remember two things.
1. Don’t include your fixed cost yet, so your cost cover beyond your variable costs.
2. Consider the overall market and ensure that your price still falls as an acceptable price for your market. If your price is double the price of your competition, it will be challenging to make sales depending on your product category.
To calculate a price, you need to take your total variable cost and divide them by 1 minus your profit margin as a decimal.
20% profit margin = 0.2
(Variable cost per product) / (1 – profit margin as a decimal) = Target price
14.18$ / (1-0.2) = 18,50$
3. The fixed cost
Fix costs are the expense you pay, no matter if you sell 10 or 1000 products. They are important to run your business, and the goal is that your product sales also cover these costs.
When you have a per-unit price, it is tricky to figure out how your fixed cost fits. Take the information about the variable cost you calculated and use them in this break-even calculator.
These calculations can help you decide how you balance between covering fixed costs and setting a good competitive price.
Conclusion
When it comes to pricing, you don’t need to aim for perfection. It is a trial and error process that depends on your product, industries, competition, and customers. Pricing evolves with your business; as long as your costs are covered and you make a profit, you can test and adjust.
The most important thing is feeling confident about your pricing and that it helps you grow your business.
What is a pricing strategy and how to price your product?
A pricing strategy is the method or approach a business uses to determine the price of its products or services. It involves considering various factors such as production costs, competition, market demand, and target customers. Pricing your product involves setting a price that reflects its value and meets the expectations of your customers while also considering your business goals and objectives.
How do I choose a pricing strategy for my business?
Choosing a pricing strategy for your business depends on various factors, such as your target market, industry, competition, and overall business goals. It is important to analyze these factors, consider the strengths and weaknesses of each pricing strategy, and determine which one aligns best with your product, market, and business objectives. Conducting market research and seeking expert advice can also help in making an informed decision.
Can you provide some pricing strategy examples?
Sure! Here are a few examples of pricing strategies:
- Skimming pricing strategy: Setting a high price initially for a new and unique product to maximize profits from the early adopters.
- Freemium pricing: Offering a basic version of the product for free and charging for additional features or advanced versions.
- Bundle pricing: Offering a package deal where multiple products or services are sold together at a discounted price.
- Psychological pricing: Using pricing techniques, such as setting prices just below a whole number (e.g., $9.99 instead of $10) to create the perception of a lower price.
What is value-based pricing?
Value-based pricing is a pricing strategy where the price of a product or service is determined based on the perceived value it provides to the customer. Rather than relying solely on the costs of production or market competition, value-based pricing focuses on understanding the customer’s perception of value and setting a price that reflects that perceived value. This strategy allows businesses to capture a fair share of the value they create for the customer.
How does dynamic pricing work?
Dynamic pricing is a strategy that involves adjusting prices in real-time based on various factors such as market demand, competitor prices, customer behavior, and inventory levels. It utilizes data and algorithms to determine the optimal price for a product or service at any given time. Dynamic pricing allows businesses to be flexible and adapt to market conditions, maximize revenue, and optimize customer satisfaction.
What is cost-plus pricing?
Cost-plus pricing is a pricing strategy where the price of a product is determined by adding a markup or profit margin to the cost of production. The markup or profit margin is usually set at a fixed percentage above the cost of production to ensure that the business covers its costs and generates a profit. Cost-plus pricing is commonly used in industries where there is a high degree of certainty in production costs.
How can I effectively price my product?
To effectively price your product, you should consider several factors:
- Understand your target market and their willingness to pay for your product.
- Analyze your production costs and ensure that your price covers these costs and allows for a reasonable profit margin.
- Research and understand your competition and the pricing landscape in your industry.
- Consider the perceived value of your product to the customer and price accordingly.
- Continuously monitor market conditions and adjust your prices as needed.
What is high-low pricing?
High-low pricing is a strategy where businesses offer discounts or promotional pricing on certain products for a limited time, creating a sense of urgency and encouraging customers to make a purchase. This strategy aims to attract price-sensitive customers who are looking for deals while still maintaining higher prices on other products. By strategically using high and low prices, businesses can drive sales volume and create a perception of value.
What is price skimming?
Price skimming is a pricing strategy where businesses set a high initial price for a product and gradually lower it over time. This strategy is often used for new and unique products that have a relatively inelastic demand, allowing businesses to capture the early adopter market at a premium price. As the market matures and competition increases, the price is gradually lowered to attract more price-sensitive customers.
What is a pricing strategy and why is it important?
A pricing strategy is a plan that businesses use to determine the optimal price for their products or services. It is important because it directly impacts a company’s profitability and market positioning.
What are the different types of pricing strategies?
Some common types of pricing strategies include penetration pricing, premium pricing, economy pricing, skimming strategy, cost-plus pricing, value-based pricing, and competitive pricing.
What is penetration pricing and when should it be used?
Penetration pricing is a strategy where companies set low initial prices to attract customers and gain market share. It should be used when a business wants to quickly enter a new market or disrupt existing competitors.
What is premium pricing?
Premium pricing is a strategy where companies set higher prices to convey a sense of exclusivity and quality. It is commonly used for luxury or high-end products and services.
What is skimming pricing?
Skimming pricing is a strategy where companies set high initial prices and gradually lower them over time. This approach is often used for products with high demand and limited competition.
What is value-based pricing?
Value-based pricing is a strategy where companies set prices based on the perceived value of their products or services to customers. It focuses on the benefits and outcomes that the product provides rather than just the production costs.
How can I determine the best pricing strategy for my business?
To determine the best pricing strategy, you need to consider factors such as your target market, competition, product differentiation, production costs, and customer preferences. Conducting market research and analyzing pricing models can help guide your decision making.
What is a dynamic pricing strategy?
A dynamic pricing strategy is where companies adjust prices in real-time based on various factors such as demand, competition, time of day, or customer browsing behavior. It is commonly used in industries such as e-commerce, travel, and entertainment.
How can a pricing strategy help my business?
A pricing strategy can help your business by maximizing revenue, increasing market share, improving profitability, differentiating your products or services, and attracting target customers. It allows you to position your business effectively in the market.
What is a cost-plus pricing strategy?
A cost-plus pricing strategy involves calculating the production cost of a product or service and then adding a predetermined profit margin. It ensures that a business covers its costs and generates a desired level of profit.
What are the key factors to consider when pricing a product?
When pricing a product, it is important to consider factors such as production costs, market demand, competition, customer perception, value proposition, distribution channels, and overall business goals.
