Pricing your product is both an art and a science, a mix of both calculation and intuition. While many retailers believe that price alone drives sales, it is important to remember that it is in fact your ability to sell that drives sales. Pricing is simply one of the many things to think about in your overall sales strategy, and will depend on various factors including your market, the range of products you offer, your competition, the sales environment and quality.
Finding the right price can seem like a daunting task. Price your product too high and people will stop buying; ask for too little and your profit margin will slide, or customers may assume poor quality. Here are six strategies that can help guide you when it comes to determining your products’ prices.
Know your market.
How much are customers willing to pay? How much do your competitors charge? Once you have this information you can decide to follow a pricing strategy below competition, above competition, or that matches competition. While it’s tempting, don’t automatically match their prices. You need to be sure that all direct costs will be covered, and that you’ll have enough leftover to cover indirect costs.
Cost-based vs. value-based.
You’ll have to decide whether you want to set your price based on the cost of the product, or based on its value. One involves determining the price you’d need to charge in order to cover all costs of the product (and make a profit), while the other requires in-depth market knowledge and setting the price based on what customers are willing to pay for your product at that given time. Depending on the market, one might be higher than the other.
Work out your costs.
Be sure to include all direct costs and any variable costs. Fixed costs such as rent, electric bills, etc. also need to be taken into account. If you want to calculate price based on the cost of the product, there is a simple formula you can use: Retail Price = [(cost of item) ÷ (100 – markup percentage)] x 100. For example, if you want to price a product that costs you a total of 15€ to produce with a 50% markup, you could use this formula to calculate the retail price: [15 ÷ (100 – 50)] x 100 = 30€. This pricing strategy is also known as cost-plus pricing, where you add a markup to your breakeven and base price on the formula given above. This is effective when you are assuming that you will sell all stock. If you don’t, your profit margin will be lower.
Set a value-based price.
Similar to our first strategy which requires in-depth market knowledge, setting a value-based price means knowing how your customers perceive your product at that time. You might be able to sell for 10€ and still earn a profit, but if the market value is 25€, you know you can price your product at this rate and still sell.
Consider other influences on price.
VAT, environmental change, cultural or societal changes, psychological factors are only some of the many factors that can influence the price of your product, and it is important to take them into consideration. You might need to price products differently for different territories, or you might want to follow a strategy of psychological pricing, selling at 8.99€ instead of 9€ (a common pricing strategy that triggers impulse purchasing).
Be flexible, and aware of change.
Prices can seldom be fixed for long. Costs, customers and competitors change, so you’ll have to be very aware of these changes in your market in order to shift your prices accordingly. Consumers love coupons, sales and seasonal pricing. You might need to follow a strategy of discount pricing at certain times of the year to keep up with the market and appeal to customers at certain times of the year, increasing traffic and getting rid of old stock.