Pricing plays a huge role in the success of the product: if you undervalue your product, you will lose profit, if you overestimate how much people are willing to pay for it, you’re not likely to attract enough demand for it. The reality is that there is no single strategy.
Selecting a pricing strategy may be one of the most difficult tasks for entrepreneurs. How much must your product cost? How expensive is it to manufacture? What is the ideal price tag for it based on demand and supply?
4 main pricing approaches
While pricing your goods or services, you must decide on a strategy rather than simply adding your profit to the cost of manufacturing them. The strategy you use will depend on your product offering as well as at what price points your rivals are selling the competing products.
1. High price
Usually, people have a pretty good idea of what is cheap and what is expensive in terms of the value a product or service can offer them. If you choose to price your product on the higher side, it should seem expensive. Your job is to increase its perceived value.
Factors that increase the perceived value of the product:
- Packaging and design: Your product should “look” expensive.
- Product differentiation: Try to distinguish your offering from those of the competitors in your industry.
- Uniqueness: If your product does not have distinctive characteristics in a crowded market, you most likely will not be able to set a cost higher than the industry average.
- Availability: You can set a more expensive price tag if you have a limited deal (for instance, an online course that admits only 10 people).
2. Low price
Remember, if you offer something that is not unique, you will always have competitors in terms of price. In case there are no substantial distinctions between your product and that of another rival, people will select by price. This may work to your advantage.
The most proven pricing approach in a competitive industry is to be cheaper. People like to get things cheap. This is the best solution if your goods are very similar to others.
The question is, how much cheaper? If it is only a very slight decrease you’re offering compared to a competing product, you might just have more success selling it at the higher price because you will more profit.
3. Niche pricing
The truth is that you can sell your product at a commercially viable price even if your site visitors don’t know who you are. You can also succeed regardless of the size of your product catalog.
Here’s how to implement a niche product pricing strategy:
- Proceed with a competitive pricing analysis of your competitors’ products.
- List three competitive products.
- Ask yourself the following questions. Is your product unique? Why is it better for a customer to buy your product, and your competitors’?
Online shoppers come from all walks of life. Some people perceive free or cheaper products as bad or low-quality products. Maybe they have been misled by offers of free products and are therefore suspicious of them. Similarly, if you put too low a price on a product, some buyers will be suspicious. Quality equals to a high price in the minds of many.
4. Optimal pricing strategy
Before you can set a price, you must first comprehend how much room there is for maneuver. A good way to start is to get a clear idea of your expenses. Costs can be divided into variable and fixed.
Variable costs are the costs you incur that are directly related to the product you are selling. Fixed costs are the costs you incur to maintain your business. Thus, by adding these figures and performing simple calculations, we can easily calculate the minimum viable cost of the product.
Choosing a pricing strategy
The price you set for your product has a big impact on sales. Start by figuring out what your competitors are doing.
If your competitors sell products similar to yours for $199, you should also consider that price. It is safe to presume that any product that sold well at $199 has been tested at other prices and $199 is the best option.
This optimal price may change over the life cycle of the product – for instance, it may be increased when the product is in high demand. But it is always important to know the best possible amount you can ask for it. If you deviate significantly from it, you might face reduced profits or even incur losses.
After you sum up your fixed and variable costs, the worth of your product, and your competitive position, it’s time to select a price. Here are some recommendations to keep in mind:
- It is better to ask more than less. A higher price increases the perceived quality of your product. If your price starts low, you will face a lot of resistance from customers when you try to raise the price, compared to when the price of your product is a little too high.
- If you are a small business, don’t compete only on price. For a small e-commerce enterprise, it is usually better to compete at the expense of added value than at the expense of price.
- Price matters. Never charge $100 for a product if you decide that’s the amount you want for it. Take $99.95 instead. It’s an age-old strategy. Customers will subconsciously think of it costing less than $100. If you want to charge more than $100, don’t raise the price to $101. Go to the next natural bracket, for example, $109.95.
- If you have an expensive product, let customers pay in installments or offer financing options whenever possible. A special offer can work wonders to boost sales.