The Secret To Perfect Product Pricing For Maximum Profits
Product Pricing is one of the most important aspects of marketing. You may have got the best website design, offer amazing products and spent huge money on marketing, however, the price of the product actually determines whether your customer is going to buy that product or not.
Product Pricing are never stagnant. As the customer behavior and competition changes, you are bound to change your pricing strategy. Especially, for startups, they have to follow a hit & trial method to determine which method of product pricing gives you maximum profits as well as builds your customer base.
Whether you should go for maximum return or low competition; focus on customer interest or more profits, etc. is quite a challenging task itself. In our earlier blog, we have discussed about the major factors that affects your pricing strategy. Today, we will discuss different models of product pricing that will not only help you gain profits and make your online store a success.
Basic Pricing Methods For Successful Product Pricing Strategy
For an online business, building a customer base is as important as making money. Sometime, you need to compromise on the profit margin to build a customer base. It is upon you and your online marketers to determine what is important for you. To help you out, here is the list of basic pricing models for your startup to help you decide that product pricing.
COST BASED PRODUCT PRICING
Cost based pricing is the most basic product pricing method. You don’t need any market or consumer research. All you need to determine your product price on the basis of the total product cost. To determine the total cost of the products, you need to take both cash and non-cash cost under consideration like the cost of raw materials, transportation, advertising/marketing cost, labor, rent, operations or any other. Also, include the land and capital equipments along with the depreciation rate in the total product cost.
Once you get to know the product cost, decide a profit percentage (also known as mark-up pricing) and calculate your retail cost. For example, the total cost of a product is Rs. 100 and markup percentage is 20%, then the total product cost will be Rs. 120. Other than this, the following also comes under cost-based pricing:
a) Cost Plus Pricing
In case, you are not the manufacturer, instead you outsource products from a source and are unsure about the product price, then you can go for cost-plus pricing method. In this method, you come up with a profit percentage or figure, which is not on the basis of product cost. This way, you can reduce any kind of risk.
b) Planned Profit Pricing
In this method, you plan your profit price or percentage on the basis of production. Widely used in manufacturers, this method assures of total profit. In this, you can combine per unit cost with output projections and come up with product pricing. For example, if you run an online bakery shop, you can offer discounts, in case somebody gives you an order of more than 10 cakes. In this way, you can break price according to the product unit.
Why You Should Not Opt For Cost Based Product Pricing Method?
The major disadvantages of cost based pricing are:
1) Since, your main focus area is profit making, you don’t consider the demand of products. Of course, you cannot consider the same profit percentage of an AC in winters as compare to summers.
2) You don’t focus on competition, which seriously affects the product pricing. You need to look into your competition without deciding the prices.
COMPETITION BASED PRODUCT PRICING
In the above product pricing method, you don’t need to do any market research. These methods are acceptable, if you have zero or low competition. In case, your online store is part of huge competition, then you need to follow competition based pricing. Here, your major focus is the market and your competition (both existing and emerging). For this, you can follow either of the following ways:
a) Make Your Product Price Comparable To The Competition
In case of standard products, you need to make your price similar to that of your competitors. You can differentiate the cost on the basis of extra features like packaging, design, flavor, size/quantity, etc.
b) Follow Market Penetration Pricing.
In this, your major focus shifts from profit making to increase your customer base. Here, you offer products at low price (with minimum profit share), in order to bring your online store into the notice of the customers. This is a great method for introduction stage.
Why You Should Not Opt For Competition Based Product Pricing Method?
1) Due to stiff competitions, sometimes you need to ignore your profit margin well as the production cost, which might lead to loss.
2) You need to keep a close watch on your competitors every time. There is always a peer pressure to come up with something new.
CUSTOMER BASED PRODUCT PRICING
If you are among those business owners who want to focus on customer, more than anything, then this pricing method is for you. In this, you set your price according to the customer buying habits and attitude towards a certain price or price change. In this, you can set your product pricing keeping in mind the following:
a) Increase Sales
Lower your price to catch maximum attention and increase sales. Offer discounts, offers, gifts, free shipping, etc.
b) Increase Volume Sales
Many online stores offer discounts on large product quantity or set a price to offer discounts. Like free shipping on the purchase of Rs. 1500 and above or 20% discount on the purchase of Rs. 2000.
c) Support Product Image
In case, you don’t want to compromise on the product price, then you should highlight some of the key features to justify its price. For example, organic product, beautiful packaging, exclusive product, etc.
Why You Should Not Opt For Consumer Based Product Pricing Method?
1) You cannot rely on this completely, as you need to take care of your production cost as well.
2) You might get a huge customer base, but you have to compromise on the money making aim.
PSYCHOLOGICAL PRODUCT PRICING METHOD
Also termed as “odd pricing method,” this method directly targets the psychology of your customer. Today, most of the store owners keep prices that tend to round to the next lowest monetary unit like Rs. 99 instead of Rs. 100 or 1999 instead of Rs. 2000 and so on. With this price, many customers behave in a rational manner and act emotionally, thinking that the price is lower. This method is cost effective as compared to others.
Why You Should Not Opt For Psychological Pricing Method?
1) It complicates the calculation for owners as well as the consumers.
2) It does not work for every business type. In case you are into manufacturing or whole-selling, this psychological pricing won’t be as effective as it will for retail online store.
3) Today, due to high consumer awareness, customers have become really intelligent. They ignore the ’99’ denomination, which leads to failure of such pricing method.
TARGETED RETURN PRICING METHOD
In this product pricing method, you decide the price as per the capital invested in your company, based on the desired ROI. To calculate this, use this formula
unit cost + (desired return x invested capital/unit sales)
Why You Should Not Opt For Targeted Return Pricing Method?
1) This method ignores the product demand, changing prices, market competition.
2) It focuses more on cost and return rather than increasing profits
3) In case, you have different product categories, it becomes difficult to calculate the investment division among products.
This concludes the major product pricing method. However, with the increase in ecommerce development stages and competition, these are not enough. Before deciding which model to follow or your online store, you need to do some research about your product and market, so that you can come up with the most effective pricing model for your online. Got any comments or suggestions? Leave it in our comment section. 🙂