How to Choose The Right Price for Your Product (3 Best Practices)

We've talked about choosing the right template, improving conversions, and a dozen other topics, but not too much about the… much talked about pricing. There are strategies on how to choose the right price for your product that you should know about if you plan to succeed (or survive) in any competitive marketplace.

Today I've picked 3 best practices (out of a rather impressive collection) about how to set your prices.

How to Price Products: The Basics

Pricing products is key to your success. This covers the essentials: calculating costs, setting profit margins, researching competitors, and choosing the right pricing strategy. By the end you’ll know how to price your products for profit.

Know Your Costs

Understanding all the costs involved in your product is the first step to pricing. This means identifying, calculating and including all costs in your pricing structure. Costs fall into three categories: materials, labor and overhead.

Fixed costs are expenses that remain the same regardless of sales volume, like rent. Variable costs change with activity, like raw materials and direct labor.

Overhead costs are indirect costs not directly related to production, like rent, utilities and insurance. Make sure you know the difference and make sure all are covered in your pricing strategy.

A Bill of Materials (BoM) can help you separate direct costs from overhead costs in product pricing. This cost breakdown makes sure every expense is accounted for so you can set a final price that covers fixed and variable overhead costs.

Set Your Desired Profit Margin

Once you know your costs the next step is to determine your desired profit margin. This means calculating the dollar amount above the cost of output per unit or percentage of revenue that’s actual profit after all expenses are deducted. A good profit margin is 5-20% with 10% being the norm.

For example if a product costs $10 to produce and you want a 50% profit margin the selling price would be $20. Consider competitor pricing, cost of goods and industry standards when deciding how much profit you want to make on a product. This strategic approach will give you competitive and profitable pricing.

Research the Market

Researching the market is key to understanding the competitive pricing landscape and what customers will pay. Data driven decision making will drive revenue.

Get data on customer preferences, competitor pricing and market trends to adjust your pricing. Researching competitor pricing and customer pricing expectations is the next step after you know your costs. This research will keep you relevant and responsive to market demand and your product pricing will reflect the market conditions.

Choose Your Pricing Strategy

Choosing a pricing strategy is a big decision for your business. Pricing strategies are often industry specific, like subscription pricing in e-commerce versus competitive pricing in a saturated market. The pricing model you choose will impact many areas of your business, cash flow, profit margins and customer demand.

Here are some common pricing strategies and their uses.

Cost Plus

Cost plus is one of the easiest ways to price a product. This method involves calculating the total cost of the product and then adding a desired profit margin to get the final selling price.

Cost plus is simple and makes sure costs are covered but has its drawbacks. If production costs go up the selling price will too and that can affect competitiveness. But it’s a good strategy for many businesses because it’s simple and profitable.

Value Based Pricing

Value based pricing prices based on the value to the customer not just costs or competitor prices. This takes into account:

• Convenience
• Status
• Unique features
• Customer service

Businesses can create inelastic demand for their products by highlighting their unique value proposition and making it exclusive. For example a product with first to market technology or unparalleled customer service can command a higher price based on value.

Dynamic

Dynamic pricing adjusts prices based on demand, location and market conditions to maximize profit and customer satisfaction. This is often used in industries like airlines and hospitality where demand fluctuates frequently.

By using data on market conditions and customer behaviour businesses can optimise their pricing in real time to increase sales and profit. Some benefits of dynamic pricing are:

• More revenue
• Increased competitiveness
• Better customer segmentation
• Higher customer loyalty

Dynamic pricing requires advanced tools and constant monitoring but can be very profitable if done right.

Competitive Pricing

Competitive pricing means:

• Pricing based on competitor prices
• Being competitive in the market
• Common in saturated markets where price differentiation is key.
  

For example if a 65” flatscreen at Walmart is $478 and $479.99 at Best Buy and Target you can price similar and attract price sensitive customers. Competitive pricing requires constant monitoring of competitors but will help you maintain market share and get customers.

Calculate Your Profit

You need to understand your profit potential. This means calculating both gross profit margin and net profit margin. Gross profit margin is how much revenue is above the cost of production, net profit margin is all expenses.

Calculating these will help you understand your product profitability and make informed pricing decisions. Let’s dive into these in the next sections.

Gross Profit Margin

Gross profit margin is a financial metric that shows the percentage of profit left after subtracting cost of goods sold (COGS) from net sales. It’s calculated by dividing gross profit by total revenue and multiplying by 100.

A higher gross profit margin means higher profit on a product. For example if your revenue is $100,000 and COGS is $60,000 your gross profit margin would be 40%.

Net Profit Margin

Net profit margin shows the percentage of profit from total revenue after subtracting all expenses. This includes COGS, operating expenses, interest and taxes.

Calculating net profit margin will give you a full understanding of your business’s profitability. For example if your total revenue is $100,000 and all expenses are $80,000 your net profit margin would be 20%.

Test and Adjust Pricing

Testing different price points is key to finding the right price. Methods like A/B testing, direct pricing research and cost plus pricing can help you find the perfect price for a product or service.

Continuously iterate and track data so your pricing is competitive and profitable. Monitoring prices and adjusting based on market feedback, sales data and changing costs is key to long term success.

Consider Psychological Pricing Tactics

Psychological pricing uses consumer behavior and cognitive biases to influence their perception of value and drive sales. Charm pricing uses prices ending in ‘9’ because $9.99 feels cheaper than $10.

Odd-even pricing sets prices that end in an odd number to look like a deal, even pricing is often used by luxury brands to look exclusive and higher price. Using these tactics can increase perceived value of your products and sales.

Monitor Competitor Prices

Monitoring and analyzing competitor prices is key to being competitive and making informed pricing decisions. Price monitoring is continuous observation of market trends and competitor pricing.

Tools and strategies for effective price monitoring will show you how your product prices compare to your competitors so you can adjust your pricing.

Use Pricing Tools and Calculators

Using pricing tools and calculators will simplify the pricing process and make data driven decisions. Pricing software can automate overheads and apply to product pricing.

Break-even calculators, profit margin calculators and competitor price monitoring software will give you insights to set competitive and profitable prices. These tools will help you balance costs and market competitiveness.

Promotional Pricing

Promotional pricing is temporary lowering of prices or offering special deals to attract customers and increase sales. Tactics like Buy One Get One Free (BOGOF), coupons and flash sales will create scarcity and increase product value.

Make sure promotional pricing gets you high value, repeat customers without conditioning them to expect discounts all the time. Seasonal tie-ins and segment specific promotions are also good ways to boost sales.

Communicate Value

You must communicate your product’s value. Work with your marketing team to develop a clear pricing strategy and message both internally and to the customer.

Value based pricing which is higher initial prices, continuous product improvement and prioritized customer service can increase perceived value of your product. Make sure everyone in the company is aligned on the pricing strategy to be consistent.

Conclusion

Pricing your product involves understanding costs, setting desired profit margins, market research and choosing the right pricing strategy. Testing and adjusting prices, using psychological tactics and pricing tools can increase your pricing power. Remember the right pricing strategy will attract customers and healthy profit margins for long term success.

Frequently Asked Questions (FAQs)

What to consider when pricing your product?

When pricing your product you must understand all costs, set desired profit margins, do market research and choose the right pricing strategy. These will be the key to your product’s price.

What’s the difference between value based pricing and cost plus pricing?

Value based pricing sets prices based on customer perceived value, cost plus pricing adds a desired profit margin to the total cost of the product. So the two pricing strategies approach pricing from different angle, value based pricing from customer value and cost plus pricing from production cost.

Why is market research important for product pricing?

Market research is important for product pricing because it helps businesses make pricing decisions based on customer preferences, competitor pricing and market trends and drive revenue.

What is dynamic pricing and how is it used?

Dynamic pricing adjusts prices based on demand, location and market conditions to maximize profits and customer satisfaction. It’s used in industries like airlines and hospitality.

How do psychological pricing tactics work on consumers?

Psychological pricing tactics work on consumers by using cognitive biases and shaping the perceived value to increase sales.