Over decades of trading, pricing of a product has been discovered to be the most important parameter that determines its success. Studies have also shown that small variations in price can raise or lower profitability by as much as 20% or 50%. In other words, you can have a great product, but if you don’t price your product the right way, it won’t sell.
Price has to be in line with what people want to pay for your product or service. If they can get something cheaper elsewhere then they will go there instead of buying from you, because of price alone—and this includes your competitors as well!
On that note, this article will be showing you some very important tips on how to price your product the right way and without affecting any aspect of the business.
Important Tips On How To Price Your Product The Right Way
Pricing your products is one of the cornerstone decisions you’ll make as a business owner. It impacts almost every aspect of your business so it deserves careful considerations. To price your product the right way, here are some factors to consider:
1.Know Your Costs:
The idea that you must first pay your expenses before adding a profit is a fundamental element of pricing. You must therefore be aware of the cost of your goods—both variable and fixed costs. To make a profit, you must also analyze how much to mark up the product and how many you must sell. Always keep in mind that a product’s true cost does not always correspond to its actual cost—additional expenses are also included.
If you only sell one product or service, it will need to cover all of these costs. If you sell multiple products, each of them can make a contribution towards your fixed costs.
2. Know Your Audience:
To price your product the right way, you need to know the spending power of your target audience. By researching the prices customers are paying for similar goods and services from your competitors, you can find this number.
While it’s risky to match prices blindly, you should make sure that all of your costs—direct and indirect—are taken into account.
3. Know Your Product:
Another important tip to note when pricing a product is that the value proposition should be able to justify its price. This is a simple one: If you can’t justify why your product costs what it does, then how can customers think that it’s worth the price? It’s not enough for you to put out an awesome product and hope people will buy into it, or even for them to just see potential in your idea. You need them to understand why they’d choose yours over another one—and this isn’t something that happens overnight. It takes time and effort.
First off, there needs to be research done into what consumers actually want/need. Secondly, there needs to be more work done on telling stories of what a product constitutes that justify its pricing so people get invested in them enough and feel compelled by their own wants rather than just seeing how cool something is at first glance.
So looking at things to consider when pricing a product or service? This is a key factor.
4. Know Your Competition:
The fastest way to have a rough estimate of what your product pricing should be is to look closely at the competition. Are the products offered comparable to yours? What pricing strategy are they using? Is it cost-plus or value-based? What additional value are they offering to customers? Looking into these questions will give you a clear picture of what your pricing model should look like.
Cost-plus pricing entails adding a markup percentage to costs which will vary between products, businesses, and sectors. Value-based pricing is measured by how much value your customers attach to your product. You have to decide which approach is most suitable for your products before making a calculation.
Competitor research helps you find out how much your competition is selling their products or services. If someone else is charging less than you, the difference may lie with your product or product packaging(or both). Or maybe there are differences between countries that affect pricing—for example, higher taxes on imports.
5. Tweak Your Pricing If You Have Multiple Products:
If you have multiple products, you might have to tweak your pricing such that it does not cannibalize your product’s sales. If you only sell one product or service, it will need to cover all of variable and fixed costs. If you sell multiple products however, each of them can make a contribution towards the costs.
And if you have multiple products and your pricing strategy is based on one product being a good deal versus another being better than it (or even just different), then you’ll need to tweak your pricing such that it does not cannibalize your product’s sales. This means adjusting how much each product costs with relation to its competitors’ prices.
6. Set Appropriate Prices Based On Local Markets:
The cost of living in each country varies greatly; therefore, there can be significant differences between how much money is needed locally and what people would usually spend on similar products from other countries where they live.
This means that prices need to reflect these differences accurately enough so as not to create confusion among customers who do not understand why certain items cost more than others.
Different geographies will have different priced products. Sometimes it may make sense to completely change the product rather than just tweak the price to suit local buying patterns. Consider the African market where people buy smaller packs because they are afraid they will rot before they consume it all.
7. Having Multiple Products With Similar Pricing Might Not Make Sense In The Long Run:
When you have a range of products that are all priced similarly, the user will perceive each one to be equally valuable and purchase it based on their own personal preferences. However, if you want your business to grow and gain more customers over time, you need something that’s perceived as being more valuable than others.
When someone is looking at two items with different prices—one higher than another—they’re going to pick up whichever one they think has more value for them because they believe there’ll be some kind of benefit from buying one over another (e.g., better quality).
Anyway, the objective is for buyers who buy either variety of the product to feel like they’re getting their money’s worth when making their purchase decision.
8. Don’t Get Stuck In Discounting Wars With Your Competitors:
The more you discount, the more likely it is that consumers will switch to a competitor that’s offering a lower price—and let’s face it, there’ll always be someone with a lower price. This can be especially detrimental if your product is meant to be relied upon for durability and reliability—people will be less willing to pay full price when they know there’s an alternative available with similar features and specifications. If this happens, you might not even sell any product at all!
It’s also important not to overprice products just because they’re newer or more advanced than other products on the market. If people are buying a product because it’s cheap (and thus doesn’t require much research), then those who have already invested time and money into researching options could jump ship immediately after learning about new ones.
In the end, you can’t ignore the fact that cheaper substitutes exist, so some sort of targeted promotion or discounting may be required to maintain market share.
9. Discount Only After Careful Considerations And Research:
Discounting can sometimes be a marketing ploy where you have already captured the majority of sales for a particular segment and are now targeting another segment through promotions. This is why it’s important to do your research ahead of time, segmentation being one of them.
If you are not sure of your product’s value proposition or feel that it should be priced higher to justify the extra cost for development and marketing, then by all means stay loyal to your original price point or tweak it a bit. But if you have done the hard work of creating a great product with strong features and an excellent user experience—and know that there is no one else in this niche who can compete with what you offer—then do not rush into lowering your prices just because someone else is doing so.
Price is the most important parameter that determines the success of a product. It should be able to justify the value proposition, and it should not cannibalize your sales by pricing too low.
These days, every company has multiple products in their portfolio and many entrepreneurs have become so obsessed with getting rid of barriers to entry that they end up trying to sell something at any cost (even if it means lowering their margins). This is not good for them and can lead customers who were loyal before over time moving away from buying from you to other brands that may have lower prices but better value than yours does right now.
Final Thoughts on How to Price your Product the Right Way
Pricing strategy describes the methods businesses use to put a price on their products or services. A solid pricing strategy helps in identifying the price at which you can make the most money from sales of your goods or services.
Pricing is not such a complex process. The key here is that you need to consider every aspect of your business and its current state before taking any steps forward with pricing strategies or changes in your model.