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How To Price A Product: Everything About Product Pricing

18 July ~ 9 min read 685 views
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Claspo Blog How To Price A Product: Everything About Product Pricing

How to price a product? This is one of those decisions you should make as a business owner to take care of your business. But you should be careful as it affects not only your business but your customers as well. It is not a secret that people want products of great quality for a fair amount of money, and as most people are price-sensitive, you should consider that during the product pricing. 

It is easy to get lost with pricing, especially if you haven't done it before. And if you have a new type of product, you should make sure that people understand the value that they are paying for. Even though you can test prices and see which works best, you still have to start somewhere and understand the principles of how to price your product. 

Table of Contents

1. What is Product Pricing?

2. Why is it Important to Price Products?

3. How To Price A Product

4. Conclusion

What is Product Pricing?

Product pricing is the development of your price based on many factors, including internal and external ones. The value of your product influences your business and its success. It can impact your popularity on the market, cash flow, profit margins, etc. 

Why is it Important to Price Products?

The bigger question than determining a product's price is why you should do that at all. We know that everyone says that it's important, but why so? If you've set a high price, you might lose some of your potential customers as they don't understand why the particular product cost is that high. And in case you've set a low price, you might run into an unsustainable profit margin. The low pricing won't let you grow and scale your business. 

The way you decide how to determine the price of a product also helps to understand your place on the market compared to your competitors. You should first start with finding the base price that will help you understand the final price. 

How To Price A Product

You can price your product in any possible way you want, but if you want to learn the art of setting a price for a product, you should follow the three steps we have here for you. 

Step 1: Find a Base Price

The first step is how to calculate the price of a product is to find a base price. Several ways can help you to find the base price. 

1. Cost-based pricing. You should add up material and labor costs and then add an overhead. This is how simply you can set the base price. Then you should add the desired percentage to make your final price. Usually, merchants add 50% of the base price to the final price, and this is considered a standard. It is a simple method that requires you nothing except five minutes of your time. 

2. Market-oriented pricing. You can also follow the other way where you compare similar products or services and learn the market so you can set the price based on that knowledge. In this case, you can set a price:

— above the market if you know that you can provide superb service;

— the same as others to set the same price as everyone else;

— below the market to get customers to buy from you because of the lower pricing. 

In any case, it is important to understand how others price similar items so you don't go too high or too low.

3. Dynamic pricing is for those who want to constantly check the market and customers' demand. You could see such pricing in the apps like Uber, where prices change during one day based on the demand and market state. However, you can change your prices once a week or once a month based on your goals and research. 

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Step 2: Experiment with Pricing

You can also go and experiment with pricing as soon as you have your base price and understand how to price the product. There is a difference between the amount of money the consumer can give and the amount of money the person wants to pay. 

The main idea here is to remain elastic. You can run tests and see the price people usually get from you. Here, you should count the profit, so if there are plenty of buyers but for a smaller price, calculate the final profit carefully as you may have less than if you would sell less but for a higher price. 

For example, you can try the methods like discount pricing, anchor pricing, or loss-leader pricing. 

  • Discount pricing. You can use this strategy when you artificially raise the price to lower it in the near future. Many people wouldn't buy products, but when they see a nice product that was quite expensive and now is on sale, they would consider buying it even if the price is just right for the item. 
  • Anchor pricing. Here you should show your customers that you've done everything possible, so they get the best quality for the best price. Show some other prices and offer the product that could be in the middle of that pricing — not like the expensive version and not like the cheap version — just right. You can find the perfect example of this technique in the Apple presentation where Steve Jobs offers a new iPad — the "base" price is $999, but Apple has turned it down to $499. Check it yourself!
  • Loss-leader pricing. Offer your customers lower prices so they can also add regular items to their basket. And as soon as they purchase your products that cost less, you can offer them plenty of other items via the e-mail they've left during the checkout. So, even though you get less profit, you get the opportunity to offer people your regular-priced items. 

Step 3: Product Pricing Should Drive Long-Term Business Profit

By far, you should understand the basic principles of determining a product's cost. And it's time to plan further. You should also consider long-term profitability and constantly check your metrics so you can experiment freely. 

At first, you should analyze the metrics you have for now. You can also form the price based on how much you spend on rent, manufacturing, facilities, utilities, salaries, marketing, licenses, packaging, shipping, website maintenance, personal income, and taxes. These numbers should form the product pricing as this is the amount of money you invest in your business. You should count such expenses each month so you keep up with your budgets. 

You can also experiment with pricing further. The pricing strategy should never be static. Among others, you can raise the price on best sellers and see how it works. It is even better if people leave reviews and photos so they create demand which alone can be a reason to upgrade the price. More than that, you can calculate the shipping cost and include it in the price but offer free shipping, which usually hooks the customers. 

Additionally, you can take advantage of different seasonal promotions and discounts. They always bring more customers both to e-commerce and offline stores. When customers sense profit, they are willing to get the product as soon as they can so they won't miss an opportunity. The free shipping option is extremely popular among shoppers as they order the desired things and add more items for the price they could spend on shipping. 

And always keep an eye on your competitors as they can also experiment with their prices. Learn from them and analyze their actions. We don't recommend simply copying their approach but rather observing, learning, and applying the best practices. 

With this 3-step guide, you can now understand how to set a price for a product. Go through this guide and your product pricing once in a while to see if something has changed or if you are ready to change your prices. 

Conclusion

The more ways you learn how to price a product, the braver you'll be while actually doing that. The pricing influences your business greatly as it covers all the initial expenses and brings your profit that helps you to grow and develop your business. 

Learn that the price is your way to grow and bring better results for your team and your customers. 

You can focus on any of the above-mentioned tactics or combine some of them to see which works best. The best thing you can do for product pricing is to be bold, brave, and do everything for your business to be more successful. 

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