pricing method

A wrong approach or bad calculations can literally take your product out of business. The pricing strategy requires a thorough research, calculations, consumer behavior examination and full break down of costs and labour. The best pricing strategy-method ensures that maximum profit is achieved.

The pricing strategy is crucial for every business. A wrong approach or bad calculations can literally take your product out of business. The pricing strategy requires a thorough research, calculations, consumer behavior examination and full break down of costs and labour. The best pricing strategy-method ensures that maximum profit is achieved. In addition, a properly calculated price will save you from future changes or improvements which in many times can lead to negative customer feelings. Research suggest that 60% of shoppers consider price as their biggest influence when making a purchase. Let’s see what are the pricing strategies you have to take into serious consideration.

What is your cost?

The first thing to do is to know exactly how much you need to create it. Every single cost of manufacturing, running expenses, materials, development, labour etc. should be considered. In the case you are a reseller the costs of buying and shipping should be calculated as well as other possible expenses. When you figure out the costs you will then have the break-even price.

 

Know the value of your product or service.

To better understand the value of your product you need to make some market research and analysis including asking directly your potential customers. There are to main questions to consider when asking the customers.

One: What would you think if this product is at this price?

Two: What are you willing to pay for this product?

The answer is usually somewhere between but be cautious and choose wisely your research group and demographic. Of course over time customer’s wallets will give you the real answer. You can then reconsider your price, package offered or any new in budget releases.

 

Competition research.

Research competition is a must if want to be in reality. How much other products are will affect your sales. See how other products differentiate and what they offer. What benefits or advantages they have. Your price will surely be affected from the competition. Reviewing your competition will allow you to attract customers by providing a lower price or even placing your product as a more luxury item.

 

Setup a price model.

You will have to setup ana pricing model by putting some factors down in order to have a clear view on what the income would be with x sales. So you know what you can achieve or what to expect.

Example: Let’s say you sell t-shirts. You have €10 cost for each item, and you are thinking to either sell them for €15 or €20. Using the below model you can make a prediction.

Model.

(Price-Cost) x quantity = profit

Option 1 - (€15 - €10) x 20 (item sale) = €100

Option2 - (€20 - €10) x 20 (item sale) = €100

This options reveal that the above case scenario someone can make the same profit by selling half of the quantity. In simple words, with a 25% decrease of the price you will need to sell double the items to make this money. Here lies the question if you believe you can sell this amount of products or if you believe is more realistic to sell less at a higher price. This decision will also be affected from the market research you did before on your customers. You can lower your price but you have to consider that you must attract more buyers.

 

Behavior numbers.

Behavior numbers means using tactics like €99 or €100 to finalize your price. Display numbers play a huge role on hoe your products or services are perceived. Usually non-rounded prices give the essence of something in lower price, in sale or even a cheaper option. On the other hand rounder prices are chosen from upscale retailers and luxury brands. Rounding up the price will make the item look more expensive. Even in this case scenario you need to be careful since studies suggest that a lower first digit is what counts more to consumer to evaluate the price. For example when we see 1 as the first digit we instantly evaluate that the price is much lower than if the first digit was 2.

 

Pricing a product as you understood can grow or kill your business. The right price is somewhere in between the above research methods. Although you have to be ready that not everyone will be happy with your price it is essential that you have the flexibility to adjust your price at a later stage in order to meet any market changes, without affecting your profit margin and overall survival.

 

Article is based on Meredith Schmidt's article for the online Entrepreneur Europe.