Choosing a pricing strategy for your product can be intimidating because there’s a lot riding on it. You can tackle this task by breaking it down using these five considerations:
You want to ensure that the price of your product generates enough revenue to cover your costs. So here’s the question: How much does it cost to take your product from manufacturing to consumption? When calculating this figure, make sure to include the price of raw materials, assembly, labor, rent, shipping and any other overhead costs you incur. Add these up and divide by the number of products you produce in the given time period. Once you’ve pinpointed the average cost per product, you’ll see precisely the revenue you need to cover all of your expenses.
Of course, you’re probably not trying to just break even — you want to make a profit. The percentage that you’d like to make off of each item is called your gross profit margin target, which you can calculate with this formula:
Where P = price and C = cost:
Gross Profit Margin Target = (P-C)/P
When you plug in your target percentage and cost, the equation will result in the price. Creating a simple Excel spreadsheet with this formula will help you calculate these figures as you add together all of your costs.
How much profit should you aim for? Target percentage varies based on the type of business. For instance, manufacturers and retailers often target 50 percent, while distributors target something around 30 percent.
Learning a much as you can about your customers will help you accurately price your products. Are they bargain hunters? Do they splurge on tech products? Do they value quality over mass consumption? While we can (and should) continue testing after setting a price, there are a few simple ways to predict your target market’s behavior and preferences beforehand. Conducting market research will outline the demographics and psychographics of your target audience and reveal their purchasing behavior. Basic database, survey and internet research (which you can do in-house) will expose common traits among your customer base. If you want a more in-depth understanding of the group’s tendencies, consider hiring a third-party market research company. This type of research demonstrates trends like how crucial your product is to their lifestyle. If your product provides a function that they can’t live without, a higher price point will not deter them. For example, smartphones have become such a critical staple for millennials that even a high price tag will not keep them from purchasing a new one every few years.
How is your competition pricing their products? This number is great jumping off point. You want your price to be competitive, but also reflect your product’s value. You will need to find out if their product has the same perceived value as yours. How do customers compare the products? What types of reviews is each product getting? Again, conducting market research and even performing your own internet searches will provide useful insight on this topic. When researching the competition, don’t just settle for the prices you can find on their website. Do some digging on review sites, or even as a secret shopper. If your product clearly provides more value than the competition, a higher price point will help indicate to your audience that it’s a superior product. If the competition’s product proves more valuable, try pricing your product just below theirs as a less expensive, but high-quality option.
4. Tiered Pricing
Does your product have options that vary in value? Compare the experience to buying a new car: Can your customers choose between standard and fully loaded? If so, you should consider adding a tiered pricing structure. Tiered pricing appeals to customers because it allows them to choose the price level that best fits their budget. If your product(s) can be differentiated through additional features, price them at points that reflect their individual values. Try using a pricing structure that offers “good,” “better,” and “best” options for products or services that have increasing levels of value. Applying this strategy can help you capture a larger portion of the market by offering multiple options for a range of shoppers.
5. Odd Number Pricing
After considering all of the above pricing factors, the exact price comes down to a matter of cents. Why does iTunes sell songs at 99 cents instead of $1? In the eyes of a consumer, a few cents can mean the difference between purchasing or passing. A pricing strategy that’s been around for decades suggests that a product retailing at $39.99 is much more appealing than one at $40. Although this difference may seem arbitrary, studies have shown that this pricing strategy is successful for the majority of product categories. Once you know that you’re competitively priced and covering your costs, test out single-digit strategies to find which best fits your target audience.
Pricing your product integrates the economics of your business and the psychology of your customers. Employing simple market research and competitor analysis will help you find your pricing sweet spot.