Decoding Product Pricing: Key Factors To Consider

August 15, 2023

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Introduction

Product pricing is an important skill to have. It is vital to price right. The firm must not overprice, resulting in being out of the market. Or charge less than your worth, which can impact its profitability.

Product Pricing: Meaning

Product pricing is the process firms follow to determine the cost of their product. Both internal and external factors influence it. It has a direct impact on the profit-making ability of the firms.

Many factors affect product price. Some of them are:

Feature of The Market
Firm’s Manufacturing Costs
Firm’s Business Model
Product Features
Competing Product’s Price

The Three Main Factors to consider before Product Pricing are:

The Value you Deliver to Customers
Your Brand’s Position in the Market
Competitor Pricing Strategies.

Why Is Product Pricing Important?

In today’s world, competition is inevitable. To survive, product pricing is one of the tactics firms use.

Product pricing is important as it dictates the profit margins of firms. Even the law of demand supports that customers demand more when the price is less. But, pricing too less, may bankrupt a firm in the long run.

The key to correct product pricing is striking the right balance. It is between what customers are willing to pay for and firms still maintaining their profits.

By employing the technique of product pricing, firms can go ahead with their goal. If the goal is sales maximization, the firm will price low. It will fetch them a larger market.

If the goal is profit maximization, the firm will price high. It will reflect the high quality and prestige of the product.

Factors to consider while pricing products

Product pricing has a say, whether launching a new product or increasing its share.

There are many product pricing techniques. In this sea of many product pricing techniques, firms must choose what suits them the best.

The factors to consider while pricing products are:

Know Your Product Pricing aim:

Every Firm has a Goal. Some well-known Product Pricing Goals are:

Profit maximization [by increasing price]
Sales maximization [by lowering price]
Venture into a new market
Cover your costs [especially during the economic crisis]
Be aware of your costs

Firstly, know the cost of running your firm. The costs are both fixed and variable. Then, plan a product pricing strategy to both cover your costs and make a profit.

Know Your Customer

Another factor to consider while product pricing is knowing the end user. How do they behave? What are the factors they consider while buying something?

How can one learn about customers?

Online surveys help. It can provide a glimpse into the existing client base.

Firms can hire a market research agency. These agencies can conduct research for the firms. It will enable firms to know whether they are targeting the right group. This information will help decide which product pricing strategy suits the firms.

Web scraping helps too. It is the process of extracting data from a website. It helps get data from different websites legally.

Value of Product

It is wise to understand how customers see the worth of the product firm offers. Does the customer view the product as saving their time or money?

How to Price Products?

Regarding product pricing, one can follow different steps:

Calculate Your Variable Costs Per Product

Firstly, one needs to calculate the variable price per product the firm produces. The variable costs that firms consider are:

Material Costs
Packaging Costs
Employee Labor
Sales Commissions
Production Equipment Maintenance
Overhead Costs
Transaction Fees
Shipment and Logistics Costs
Add a Profit Margin

After the firm calculates how much it will spend on the product. Now, it is time to calculate the profit margin. Profit margin is the percentage sum of money the firm saves, after paying its cost.

Assess the Market

Now, conduct market research. Here, data scraping could help. Via data scraping, the firms could get information about their competitors. It enables firms to ensure that it is priced right. Also, the firms can get information about the status of their competitors.

Fix a Price and Track It

Fix a price. Make the product available to consumers. Then, watch the reaction of your target audience.

For example, look at your sales trend. Is your product selling faster, or is it lower than you expected?

What are the different pricing strategies?

There are many pricing strategies. Choosing the correct technique is important. It can help the firms strike the right balance between attracting customers and still making a profit.

In this blog, let us discuss the different pricing strategies.

Cost Plus Profit Pricing

In this method, the firm relies on the product’s manufacturing cost to price the product. It determines how much the firm spends on manufacturing, then adds the profit they want to make. While considering the cost, it is vital to ensure that all the input costs are under consideration. Input costs include input cost, labor cost, supply cost, etc.

Competitive Pricing

For the firm to venture into product pricing, competitive pricing is another strategy. Here, firms conduct market research. It gives a fair idea before pricing the product. Firms can also make use of data scraping. Via it, firms can get information about their competitors and the techniques employed.

Using the information, they collect; firms can use three competitive pricing options:

Price The Product Below The Market: By doing so, firms can attract new clients.

Price The Product Equal To The Market: It spurs customers to buy a product, based on the brand they like and not just considering the price.

Price The Product Above The Market: Well-established brands use this technique. It helps them increase their profit margin. Firms can use this technique for Veblen goods. Veblen goods are those goods whose demand increases even when their price increases. For example, branded cars, wine, etc.

Freemium Pricing

Software firms use this strategy. They offer two different kinds of services, free and premium. A limited period of free services is offered, like for a month. After that, they offer a premium. To avail of premium service, they charge a fee.

Conclusion

Product pricing is a foundational pillar of every firm’s strategy. It is so because their ultimate aim is to make a profit.

Jeff Bezos emphasized the importance of pricing right when he stated, ‘Lowering Prices Is Easy. But Being Able To Sustain Lower Prices Is Hard’.

There are different techniques of product pricing. Firms can choose, depending on what suits them the most. As product pricing impacts every part of their business.

In today’s interconnected and well-informed digital era, customers are now informed of the sale available to them. They inquire and compare before making a purchase.

Thus, firms need to comprehend the concept of product pricing and utilize it correctly and suitably.