One of the keys to business success is pricing your products properly. But it’s easier said than done. Setting the right prices for your products is a balancing act. Ask for too much and you risk losing sales and market share. Ask for too little and your profit margin or the perception of your product quality suffers.
While finding that magic number might be tough, it’s not impossible. All it takes is a little research and a basic understanding of how shoppers think and behave. Just remember, the ‘best price’ factors in all your costs and maximises your margin while remaining attractive to your customers. With that, here’s how you can ensure the price is always right.
Know your customers
Before you decide how to price your products, you first need to know who’s going to buy them. The problem is, not all customers are the same. Instead of catering to all segments of the market, especially at the start, try to identify your target audience and make your brand and products appeal to that customer segment.
Defining your customer profile provides you with a better understanding of their buying behaviours, purchasing motivations and habits so you know exactly what they’re looking for and how much they’re willing to pay. Be it bargain hunters who seek the cheapest deals; convenience shoppers who value time savings and accessibility; or status chasers who only opt for luxury and branded products; you will then be able to create the right price point for better sales and profitability.
Do the math
A fundamental tenet of pricing is that you must cover your costs and then factor in profit. That means you need to have a thorough and realistic view of your unit cost, so you know how much to charge to make a profit. While the unit cost generally means the literal cost of your product, in this case, it should also include overhead costs such as storage fees, employee salaries and rent charges.
Many businesses make the mistake of either not factoring in all their costs and underpricing their products or trying to make too high a profit and overcharging. A good way to keep track of your monthly costs is using a spreadsheet. Once you’ve determined your unit cost, use a margin calculator to work out the appropriate price you need to achieve your desired profit margins.
Check out the competition
According to an article by FitSmallBusiness.com, 87% of online shoppers indicated that price was the most important purchase factor. What this means is shoppers are constantly on the lookout for better bargains and cheaper prices and if you want to remain competitive, it’s time to start looking at your competition.
Knowing your rivals’ strengths and weaknesses will help you identify gaps or additional value in your own offer so you know if you need to beef up your product offerings or ask for a higher price. Start by preparing a head-to-head comparison of your price versus your competitors’ prices. You can get this information from the internet, secret shopping or even your customers themselves. Once you know where you stand, you’ll be able to price your products better.
Common pricing tactics
When it comes to pricing your products, there’s no one-size-fits-all formula. The good news is, you can get a sense of what works by checking out what top online retailers are doing. Here are some noteworthy pricing tactics to consider.
Psychological pricing: Often called charm pricing, this strategy involves using pricing that ends in ‘9’ and ‘99’. This has been proven to be an effective tactic as it makes shoppers instinctively feel like they’re saving money.
Prestige pricing: The opposite of charm pricing, prestige pricing or premium pricing involves pricing a product at higher-than-normal prices to give consumers the perception that the product is of high value and quality. This is most effective for retailers of branded or luxury products.
Captive product pricing: A common strategy used by companies that market product lines, captive product pricing offers consumers a low price for the core product but high prices on their accessories, or captive products. Examples include printers and ink cartridges, razors and razor blade refills.
Skim pricing: In this pricing strategy, businesses charge a high initial price during product launch and gradually lower the price over time. Skim pricing targets two audience segments – the early adopters at the start and price-sensitive consumers when the price goes down.
Anchor pricing: Similar to skim pricing, anchor pricing also offers shoppers a discount but goes the extra step of listing both the original price and the sale price to relay perceived value. This strategy is often used during sales.
Loss leader pricing: This is a marketing strategy that sees retailers selling selected goods below cost to entice shoppers to buy and, hopefully, spend their ‘savings’ purchasing other profitable products. An example of applying loss leader pricing is during Cyber Monday and Black Friday.
Variable pricing: Variable pricing involves altering the price of your products based on demand and supply. This pricing strategy is commonly used in environments where supply and demand information is easily available, such as in auctions or on the stock markets.
There’s no right way to price your product nor is there a perfect price that guarantees sales and profits. Every business is different and your costs, customers and competitors will change. What you should do is always keep an eye out and an ear on the ground and pay attention to what your customers are saying. At the end of the day, the right price is what your shoppers are willing to pay and that depends on their perceived value of your products. Start selling today with Shoptiq’s 14-day free trial!