How to Price Your Products
How to price your products for the goods you sell online? One of the most important elements that contribute to the decision to purchase online is the price of a product. The growth of eCommerce has allowed sellers to be increasingly competent and attentive to the interests of customers. As a result, online stores are progressively playing on equal terms and one of the best methods for generating sales is having a good pricing strategy.
But, what is the right price for goods on the Internet? Going low is not always the recommended solution, and there are real strategies to decide the rates to be applied to selling products online and many questions to ask:
How do you set the price of products in an eCommerce store?
What are the factors to consider?
Must it be the same as a (possible) physical store?
What is the role of the competition?
Do you take your competitors as a reference?
Are you trying to offer very low rates even at the expense of your earnings?
Before eCommerce, setting the price of a product was relatively simple; you took into account the costs of production, promotion, other overheads, looked at competitors prices and then based your pricing around that.
Since the popularity of the internet, the needs have changed, the market has expanded and the price has become (even more than before) a marketing act. The price expresses not only the value of the product, but the relationship between costs and gains, and the value perceived by consumers.
Applying the price means making a decision that on one hand is satisfactory for those who buy, and on the other is in line with the competition and allows the business to generate profit.
The price represents one of the four elements of the old marketing mix (together with product, place, and promotion). The challenge is right here, trying to understand what the price is that the user is willing to pay to buy your product or service, also taking into account the promotion to be done and the context in which you sell.
How to Calculate The Selling Price of a Product
Knowing how to calculate the selling price of a product can be tough, as there are many factors to consider. In addition to fixed and variable production costs, customers must also be taken into account, as it is they who will eventually choose to buy that product.
Identify and study your target market, and above all, what perception of your product you want to convey to your customers.
Do you want to be known as the company that provides the lowest prices?
This could be a good strategy at first when you are new and need sales, but it may not be a good option for you long-term.
Do you want to be considered as a premium business?
Also a good option, as you can charge more money and build your brand on prestige. You actually need to have a quality product/service though in order to justify this. Simply charging premium rates does not make you a premium business.
Generally speaking, calculating the product pricing formula should consider the following, if they are applicable to you:
Rent (Warehouse, Retail Space)
Utilities (Electricity, Water)
You can’t run your business without turning a profit.
And at the end of the day, there are many expenses which make up the cost of your overheads to stay in business.
All of these expenses need to be taken into consideration when you calculate the selling price of a product.
If they aren’t priced high enough, you can’t turn a profit, which means you can’t stay in business.
Add up the total amount of expenses that you would need to pay monthly. As close as you can to an exact/average figure, but on the higher side to account for cost increases and variables.
For the sake of mathematics and simplicity, let’s say that all of the above costs you $1000 per month.
You would have to sell 100 items at a retail of $10 to break even for the month.
So, if you priced this item at $15, and still sold 100 of them, your gross profits would be $500 per month.
While gross profits generally don’t include fixed costs (things that need to be paid regardless of sales) such as rent, insurance, and salaries, many people prefer to take those costs into consideration when pricing their products in the form of absorption costing.
It could be beneficial to account for fixed costs when your online store is brand new because your overheads would be lower and your pricing can still be competitive. As your business grows and expands, you may change suppliers, manufacturers, facilities, and other elements of the business which would require you to calculate a new pricing formula.
Product Pricing Methods
Finding the right product pricing methods will greatly depend on what you sell, where it comes from, and who you sell it to. In addition to the formulas and calculation methods we just covered, there are also many strategies that you could utilize as well.
Cost + Mark Up
This is a fairly simple pricing method to go by and is actually quite common.
You total the full amount it costs for an individual product and add a percentage on top of it to get your retail price.
Materials = $20
Production = $10
Distribution = $5
Labor = $10
Overheads = $5
+ 20% margin = $10
$60 Retail Price
$10 Profit Margin
No doubt you have seen this product pricing method in action before.
Ever seen something for sale at $19.99?
Why isn’t it $20, it’s only one cent?!
In this situation, your brain sees the first number, a 1, which happens to be smaller than 2.
Your perception of the price immediately becomes cheaper than $20, and not by one cent.
Because of this, you can actually perceive the number as being lower than it really is.
You would naturally read the price from left to right, so the first thing you say when you read it is “19”, forgoing the extra 0.99c, which is pretty much $1, and thinking that this is the price of the item.
We tend to exclude the “change” when considering the cost of something, as our minds want to focus on the full dollar amount involved.
If it was $20, your brain is placing that item into a different category; things that cost between $20 – $30 or things that cost $20 or more.
You then think, “is this really worth $20?”, as opposed to, “$19, that’s pretty good.”
This pricing method has been around for a long time, but as consumers psychological objections caught onto this, retailers started to try and combat this by changing the cent component.
For Example: Instead of charging $19.99, they charge $19.90
This way, the brain sees the 1 first and a 0 last, psychologically making this item even cheaper for some.
This is when you group together single items to make a bundle or package, and then charge a cheaper rate in comparison to buying those products individually.
Think of a combo meal at a fast food restaurant.
You could adopt this strategy to push stock that isn’t selling too well, taking up too much space, or just to provide more value to your customers.
Price does not have to be fixed and can change due to the needs of both the seller and the customer. Specifically, these are some factors that can affect price flexibility:
Launch: You can decide to offer the product at an advantageous price giving the first customers the chance to try it
Out of Season: If you sell a seasonal product, such as a swimsuit, you have to take into account the peaks of demand and treat the price of your items accordingly
Buyer Types: Think of airplane classes; Economy, Business, First
You can also decide to vary prices based on your products and the type of buyer persona who would purchase them
Sales Techniques: There are strategies that can help you increase sales such as up-selling and cross-selling
Time-Based: Offer only available for X amount of time
Discounts: You can offer coupons at various times such as different seasons, national holidays, and slow periods when sales may be lower
Let’s say that you sell special oils.
You have focused everything on the quality of raw materials, innovative production methods, and created a marketing plan that highlights the value of each of your products.
Now, you have to set the price.
Of course, your oil is a niche product, for real connoisseurs, willing to pay more to get the best. You can not go down, as you would devalue all the work done up to now.
You have to present your oils at a higher price than the average, and this price is due to the fact that for the production you have to spend more, but it is also given by the value and perception you want to convey: your product is unique, exclusive, precious, and premium.
You can probably think of a few designer labels and types of cars that do this.
Price is a decisive aspect in the perception of a brand and its products. It is necessary to consider this detail and establish a price that goes beyond the financial aspects. People can be willing to spend more than they normally would if they can justify it.
As the name implies; you have cheap prices.
This pricing model places you in the “budget” or “economy” section of your niche.
You’re the low cost, no frills provider that is aimed at price-conscious consumers.
There’s nothing wrong with this, at all, and there’s plenty of businesses that do this.
The thing is; you generally need to sell high volumes in order to generate good profits.
You could build a loyal customer base over time who will always come back because of your prices, so you could have a general forecast on sales for the next month just based on repeat customers.
Study The Competition
Price is sometimes dictated by competition. Thanks to tools such as price comparators you can see what price your competitors attribute to the same product that you are going to sell.
These tools are very useful for establishing the prices of popular and sought-after products, such as those of a brand in particular (a shoe of a particular model, a cosmetic, a mobile phone or other electronic devices).
If you sell high-demand goods, where there is big competition and you have the possibility to set up your product at an advantageous price compared to the average, take advantage of comparators such as Google Shopping and other similar ones.
At the same time, if the competition is low and your product is rare (oils as previously mentioned) you can have greater decision-making power and be able to set the tone.
Is That All to Pricing Your Products?
These are just a few things to consider, and as you can see, the price decision is anything but simple to take. It is always necessary to make an analysis upstream, which includes a thorough study of the target, market, and competition.
It’s also important to know the market trends and the characteristics of the customers. For example: if a market is in decline, prices cannot be too high, while if the product is prestigious and difficult to buy, (probably) a higher price than average is understandable.
You will ultimately know better what applies to your niche and what doesn’t, in addition to the rules and regulations of your country.