Product pricing is one of the most difficult decisions for companies to make when it is time to launch a new product. There are many types of pricing strategies present in the business world. In the sea of different pricing models you, as a business owner, need to find the suitable one. In contrast, product pricing is complicated, constantly-changing, and based on many different factors.
If you are thinking of introducing a new product/service, or just making price changes on the existing ones, here are the factors to consider for creating a higher profit margin.
Regardless if you’re an enterprise, or a small business, without a business goal you can’t succeed.
The first step is to be clear about what you want to achieve with your product pricing strategy. Is it maximizing profits? Or maximizing market share with your products?
For example, one of your goals can be to maximize market share with your product. That might result in costs decrease or in what economists call “network effects”. The value of your product increases as more people use it. While listing your goals, you need to understand that prices aren’t enough to drive sales alone. That’s why it is vital to be aware of your ability to sell and avoid making poor pricing decisions.
Product pricing comes after you learn everything about the costs of running your business. The first thing that you need to think of when developing a pricing strategy is the following: You must cover your costs and then consider the profit.
To be more precise; let’s split costs under two headings:
Fixed costs: Regardless of how much you sell, it is the cost that you always need to factor in. For instance: rent, labor costs (salaries), materials, and so on.
Variable costs: This type of cost mainly cover extra things. Those are additional materials, labor or transport, etc. Therefore, they can fluctuate over time. Once you calculate the cost of producing your product and service, you must set a higher price than the variable costs. That’s the only way to make a profit and ensure cash flow.
Another important aspect to consider when setting the product pricing strategy is the customers. It is vital to investigate what do the customers want from your product or service. Are they driven by the cheapest version available? Or they consider that expensive is equal to quality? What role does the price play in their purchasing decision?
Answering these questions will give you a better insight into who your audience is and what should be your selling price.
But how can you learn more about your customers?
Your research can start from informal online surveys sent out to your already existing client base. You can also hire a market research agency to conduct this research for you. Therefore, you’ll know if you are targeting the right group. Then you’ll be able to decide what would be the most suitable pricing strategy for them.
Understanding your customers is also important when it comes to deciding what should be your market position. You need to make a decision. Do you want to be the most expensive? The most luxurious or high-end brand in your industry? Or maybe you want to be the cheapest one? Of course, you can always choose to be somewhere in the middle. Those are all different price points.
Why it is so important to decide in which direction you’ll go?
The price that you set for your product or service will create a brand perception in the eyes of your potential customer. For example, you can position yourself as a low-cost leader, where customers will know that low price is your strongest weapon.
What is your product worth to your customers? Does it save them money or time? If that is the case, then you can base the price more on the value that it has for customers instead of minimally exceeding its production price.
There are many factors that should be taken into consideration when deciding on a product pricing strategy. Therefore, it would be useful to run a few pricing calculations in order to come up with the best solution. There are a few of them that you can use as a starting point:
Cost-plus pricing: this should be your minimum price. You need to set a price that will cover your production costs. After all, your aim is to make some profit.
Fair pricing: no matter how good or useful your product/service is, no one will be willing to pay for it if they find the price unfairly high
Price based on the value: as we have already explained, this should be your maximal price
Market research is necessary in order to decide how much you are going to charge for your product or service. For products and services already available, market research can tell you if you’re on a good path. For example, while conducting market research you can use the results to create a business plan.
Another option is to measure the success of your current plan. The next key component of market research is comparing your prices against your competitors continuously. That way you’ll discover underlying profitability on a monthly basis.
However, checking out the overall profitability of your company every month is not enough. You have to focus on the profitability of every product you sell. That means you have to analyze your product one by one. Such great analysis is a matter of time and a huge effort.
Fortunately, you do not have to spend endless hours doing it. Instead, price monitoring tools like Price2Spy are a great way to track competitor prices. Also, they help you determine product pricing opportunities. Moreover, you can use price monitoring tools when it is time to segment your market. Differentiating your product or service from your competitors can also be done.
After everything being said, we can come to the conclusion. One of the most important things to focus on is listening to your customers. The second one is to keep track of your competitors. And finally, have a budget action plan in place. Remember, in order to maximize profitability, you must achieve balance. That means finding an optimal price.