Pricing your products for the online market can be a tough job, especially because as an online retailer, you have to face competition from hundreds of other retailers who might be selling the same/similar products. A few months ago we published an article that talked about some unusual pricing strategies that make use of certain psychological factors to decide on the most lucrative price for a seller. The strategies discussed in that article, like the rule of 9 (Why is it 99 cents, and not a dollar?), are great to use, but first you need to have an idea of the actual pricing of the product. There are other questions that we will endeavour to discuss in this article, like when to raise prices and when to slash them.
Let us first understand one thing – there is no surefire way of deciding the price of your product. There are various strategies that you can apply, and if work smartly and observe the market, you will create a good foundation for your business. So what are the factors that you must consider while pricing your product?
Obviously there is the cost of creating/sourcing the product; there is the market value of the product, the demography that you plan to focus on and of course, your competitors. These considerations usually leave a wide range of pricing options available to you. But beware, if you price your product too high, customers won’t buy it. And if you price it too low, you would not be able to gain sufficient returns from your business venture.
So let’s take a look at some of the pricing strategies that you can apply.
How to Price Your Product?
Ask Yourself These Questions
First and foremost, it is time for some introspection. To price your product, you have to know your product, know your market and know your customers. Here is a list of questions that will help you do so. Take your time with them, and try to answer them as honestly as possible.
- Is your product/service unique? , i.e., are you entering a niche, undiscovered market?
- What is your customer base? Are they predominantly urban or rural? How much do you think your customers make per year? How much would your average customer be willing to pay for the service/product you offer?
- What are the costs that you are bearing to make an individual sale? If you are manufacturing the product yourself, what is the cost price? How much does your shipping partner charge you per product? What are your administrative and logistical costs and can you break them down to a per product basis?
- Who are your competitors? How much do they charge for the products they sell? Can you discern a pattern in their pricing strategies? Do you think your competitors undercharge/overcharge for their products?
- Have you done a break-even analysis? How many sales would it take for you to break even? How much time would it take to sell that many products?
- What can you predict about your market in the next five years? What are your expansion goals in the next five years?
Calculate Your Profit Margins
After you are done answering the above questions (we are sure that will take some time, provided you are being thorough), it is time to calculate your expected profit margins. There are three profit margins that we would consider – direct cost margin, break-even pricing and profit pricing.
- Direct Cost Margin: Direct costs margin is the margin that you can accumulate after paying for all the costs directly related to the product you are selling. This includes fabrication, transport, sales costs, shipping, administration, logistics, etc. Here is how you calculate it:
Direct costs margin = Sales price – Total direct costs
Direct costs margin % = Direct costs margins / Sales price x 100%
- Break Even Pricing: Secondly, you can calculate your break-even pricing using the direct costs margin. First, calculate the break-even volume, or the volume of products that you would need to sell to break even:
Break-even volume = (Fixed costs / Direct cost margin %) / Selling price
Using the break-even volume, calculate the break-even pricing:
Break-even price = Direct costs / unit + Fixed costs / volume
- Profit Pricing: The break even pricing will give you a null profit, null loss situation. It is not a bad situation to be in, compared to a few others. But you came into this business to procure profits, and now you need to calculate a profit price:
Profit price = direct costs / unit + (fixed costs + desired profit) / volume
The desired profit in the above formula will come from market considerations and other factors in the first point.
When to Slash Prices?
Okay, so you have arrived at a figure for pricing your product. Now the next step – never make the mistake of being static in a dynamic market. Your pricing strategy needs to be agile, so that it reacts to the changes in the market. You need to know when to change the price of your product. The key is to monitor the market – see how your competitors react to your pricing strategy. Get customer feedback. If you feel that there is a need to slash prices, try giving out discounts first. This way you are not committing to lowering your prices, but you can still observe the effects of the idea. Lowering prices is generally not advisable unless you are looking to aggressively increase your market share.
When to Hike Prices?
Again, the key remains the same – watch the market and experiment. You could try slightly increasing the prices for a period of time and offering your customers a bonus in return. Increasing your prices is necessary. If you don’t, you won’t be in business for too long. As you expand your business, your fixed costs would increase, and you would have to do something to compensate them. The important factor is to know when and how to do so. And the solution to it is to keep experimenting with schemes and offers until you find one that is profitable for a period of time.
Source: Browntape Blog