How to Price a Product: 5 Steps for Pricing Goods and Services

Product Pricing is a critical aspect of a business that could mar or make a brand. The process of pricing a product involves a complex decision that entails costing, identifying a target audience, doing customer research, checking competitor's prices, choosing the right pricing strategy, identifying the rate of product demand and so on.

With the right product pricing process and strategies, a business could improve its number of sales and revenue generated over a period of time and vice versa. In this guide, you will learn all you need to know about how to Price a Product.

5 Steps to Price Your Products

Product pricing involves the process of setting the most suitable price for a product. In other words, it is the process of choosing the appropriate selling price for your goods and services. When pricing your product, there are 5 basic steps you need to follow. Here they are.

1. Determine the Cost

Before determining the price for your product, the first thing to do is to calculate the overall cost associated with the product. By so doing, you would need to know the total cost of each unit of your product. This will help ensure that your business doesn't run at a loss.

You'll also take into consideration the fixed and variable costs of your product production. Fixed costs are the costs that don't change irrespective of the volume of production that your business does and they include rent, machines, insurance etc. Variable costs on the other hand are the ones that directly influence your production output and could change from time to time. This includes the cost of raw materials, packaging materials, labels and so on.

Once you've recognized the total cost considering the fixed and variable costs, then you need to determine the cost per unit of the products. To get your cost per unit product, simply divide your total cost by the number of units you have. With that, you will be able to determine the accurate cost of each unit of product.

2. Look out for Competitors Prices

The next step would be to check the prices your competitors are offering the goods or services. While doing this, you should ensure that you are comparing prices with a direct competitor of your product and not just similar ones.

If your business is into alcoholic wine production, then you should look out for competitors in those areas too and not companies producing soda drinks or fruit juice. In the same vein, you should also look out for competitors within the same geographical location as yours and those who target the same audience as yours.

You should understand that the prices of products could differ based on location. So if a competitor within your city sells a product at a lower price compared to other businesses in another city, it's best you compare your pricing with those around you and not the other way.

Also, you should ensure to consider as many competitors as possible. Once you've noted their prices, then you can determine a fair yet competitive price that will suit the customers.

3. Make Customers Research

Customers are an important aspect of your pricing and as such you must do research on what they feel before setting the price for your product. Beyond checking out for competitors, you should also conduct research on what your direct consumer feels your product should cost. They should be able to tell you a fair price in which they can pay for your product. You can gather this type of information from them through questionnaires, surveys, checklists, interviews etc.

Customers will be more willing to buy your product if they feel the price is fair enough. On the other hand, if your price is too high, sales will reduce. And if it's too low, customers could feel your product brand is of low quality and buy from a competitor. So it's important to put them into consideration before determining your pricing.

4. Determine Your Profit Margin

Once done with the 3 Steps above, now is the time to determine your profit margin. This would be the profit you wish to make per each product unit. This profit margin would be determined by you as there are no fixed ones for businesses. You can decide to add a 20% or 150% profit margin. However, you should remember that the product must not be too expensive or cheap to customers.

5. Adjust Prices as Required

With time you would need to monitor and adjust prices. Prices of your products are bound to change as a result of market fluctuations or any other internal factors. You may also find that some product pricing strategies do work for a particular time or product. As the case may be, you would need to monitor your price, so you don't run your business at a loss.

In situations when you need to reduce your prices, be sure your business is still generating profit and when you increase the price, it should be worth it.

Product Pricing Strategies

When it comes to pricing a product, there are several strategies that could be applied depending on your business needs. Below are some of the most popular product pricing strategies.

1. Penetration Pricing

Penetration pricing is helpful mostly when a new brand wants to enter the market. Bearing in mind that the market is competitive, you could use penetrative pricing by offering your goods or services at a relatively below the fair price. With that, you quickly enter the market with juicy offers that make customers attracted to your brand. At this stage your business could be making little profits, however as it gains its visibility and market share, you can alter your price.

So gradually you bring the price up to meet up with the average price of the products.

2. Cost Plus Pricing

The cost plus pricing is the most common and easiest pricing strategy. It involves calculating your product cost price and adding it to a desired profit margin in order to determine the selling price of the product.

This strategy works well if the units of products calculated are all being sold out, otherwise, you could experience a reduction in profits or run the business at a loss.

3. Competitor Pricing

Competitor pricing involves monitoring the price offered by your competitor for a product. The aim therefore will be to ensure that your price remains the same or goes a bit lower than theirs.

With that, it becomes easier to gain consumer's trust and loyalty as most customers do not like to go beyond the normal price range. You should also be cautious when using this strategy so you don't end up running the business at a loss when you offer a very low price.

4. Price Skimming

Unlike penetrative pricing, price skimming involves introducing your product to the market at a relatively high price. This strategy is most useful when the product is in very high demand and when there are fewer competitors.

So after bringing the products to the market at a high price, you will gradually reduce the price as time goes on.

5. Psychological Pricing

Customers' decisions to buy most time are emotionally based. As such, businesses too apply psychology when setting their prices.  A little difference in your price offer could make customers buy from you rather than your competitors.

We've seen cases where consumers purchase products with a selling price of 199.9 pounds rather than that of 200 pounds. The trick is that customers really do not pay attention to the fact that both figures are quite in the same price range. As such the former price is more favored than the latter.

6. Price Anchoring

This strategy involves offering different prices for your products. This way you can have two different products which serve the same purpose having varying prices. The trick is to offer low and a high price for the products such that customers who can't afford the high-priced one will go for the low-priced product. With that, your business can serve several categories of consumers and you can be sure that your business makes a profit irrespective of the prices you give.

7. Bundle Pricing

Bundle pricing is particularly useful if you wish to offer different products as a package. This pricing method is usually enticing to customers as they feel they'll be getting two or more products for a price.

You could create a buy 1 get 1 free package or buy 2 get 1 free. At the same time, you can offer a product while getting another product or service for free. The goal here should be to offer several products as a bundle to attract customers to buy.

8. Dynamic Pricing

Dynamic pricing is also called demand or time-based pricing. This pricing is usually used for products whose demands change or vary in seasons or specific periods of time. As a business offering products with dynamic pricing, you will increase your price when the product is in high demand and lower it when the demand reduces. So the trick is the prices would vary based on the level of demand for the product.

9. Value-added Pricing

Value-added prices are used most time by well-known brands who wish to offer their product at a price equivalent to the value of the products. In most cases, value-added prices are used when customers are willing to pay for a product based on the value it renders and irrespective of the price the other competitors give.

So before a brand can use this pricing strategy, they must do research and be sure customers are willing to pay for the value of the products. This price usually will be higher than that of other competitors' products but could offer attractive value-added features like convenience, uniqueness, high quality, technologically inclined characteristics and many more.

It's important to know that this strategy works well with brands that have built trust and loyalty with customers over the years and not new businesses.

Benefits of Using the Most Suitable Pricing Strategy

Most times it's not usually about using pricing techniques but it's about using the most suitable ones. There are some benefits your business could derive from using or combining one or more pricing strategies.

1. Helps to attract customers

Customers are more likely to be attracted to your brand if you offer an averagely fair price than when you offer a high or low price for your product. Knowing the right pricing strategy and following it then helps you determine the best price for your product. This in turn attracts more customers to your business.

2. Ensures the brand stays competitive

Following the right pricing strategy helps your brand stay competitive in the ever-changing world. Setting the most suitable price for your product helps your business stay more relevant in the market. Although customers don't love to be over-charged, they will be willing to pay for your goods and services if they feel your product price is worth it. Being able to recognize customers' perceptions about your product, your competitors' prices, the value your product offers and many more are the points you would want to consider before setting a price.

3. Helps in maximizing profits

Making a profit is one of the sole aims of every business. With the right and most suitable pricing strategy, realizing profit from sales becomes much more achievable. By setting an optimal price that goes in line with customer's expectations, a business could make more sales, generate more profit and develop a healthy long-term business relationship with consumers. A poor pricing strategy on the other hand could lead to reduction of sales, lower profit and impede business growth.

4. Improves customer perception

Customers would most times have their perception about your products or brand in general. This could also be based on the prices of your product. When brands offer a relatively high price compared to other competitors, customers could feel the product is of premium and high quality.  On the other hand, a low-priced product could mean a low-quality one.

With that being said, one would think the perceived high-quality product would bring a good sale which is usually not the case. There are strategies to pricing and this must be understood to maximize sales. Offering the most suitable price by taking into consideration customer's expectations and preferences helps the brand achieve a positive and healthy customer perception.

5. Enhances customer loyalty

By offering fair and competitive prices, customers will be willing to stay with the brand over the years. Selling your products to them at a reasonable price helps them value your brand and stay loyal. Even in the face of economic downturns and challenges,  customers will be willing to buy from you so far as they understand that product prices are affected by conditions outside the control of the business.

6. Essential in financial planning and forecasting

Using a suitable pricing strategy not only helps the business make a profit but it could provide insight into the business's financial planning and forecasting. Keeping adequate data and records of product prices and pricing strategy could help make better-informed decisions when it comes to production, inventory and management. Apart from that, a consistent review of pricing strategies could help businesses determine what works best so the brand can achieve its financial goals.

Register Your Company with Incorpuk Today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

Conclusion

As a business owner, determining the most suitable price for your product is essential to your business growth. As such you must ensure that your product pricing system and techniques are aimed at maximizing profits for the company while also putting customers' perception and satisfaction into consideration. Do you have any questions about how to price a product? Kindly contact one of our experts at Incorpuk today.