You're at the stage where you need to price your products, but how exactly is this done? Pricing is one of the hardest things business owners face: too low and you won't make any money and too high, and you won't sell any. We'll share with you some common pricing strategies, along with some common pricing misconceptions.
What to Know Before You Price Your Products
Creating a pricing strategy which works for your business should be done early on in the start-up stage. It's not a do it once and forget task though. Regular pricing reviews are required to ensure you can maintain and/or increase your profitability. You also need to undertake some research and be clear on a few things, including:
- what your costs will be - this includes the fixed costs, such as electricity and phone plans, and direct costs, such as the materials you used when making your products or delivering your services.
- who your customers are - learn about your potential customers. Find out if they are after the cheapest price, or the best value. Will price play a role in their buying decision? Do they buy products or services at lot or high end price points?
- market position - where about in the marketplace do you want your business to sit? Top end, the cheapest, middle of the range?
- what your competitors are doing - what do they charge for their products or services? Are there any add ons they offer? What position do they take in the marketplace? How are customers responding to their pricing?
- your level of profit - how much profit would you like to make? Remember that as well as materials, you also need to cover yourself for your time too.
Deciding On Your Pricing Strategy
There are many different pricing strategies which you can use to price your products or services. We're going to walk you through several of them, helping you to decide which is the right strategy for your business:
- Cost based pricing - this involves working out the total cost it takes to make the product, and then adding a percentage mark-up. Cost + Mark-up % = Price. A 50% mark-up is standard in the retail industry. This pricing strategy works well when your competition is also using it, as they will not be vying to out price you.
- Competition based pricing - based upon what your competitors offer, you mark your price above, at or below the market rate. When using this strategy, you do not consider the product cost or the demand for it. Competition based pricing is used when there are a lot of businesses offering the same product, and the pricing will likely change often.
- Dynamic pricing - as demand rises, prices go up. This is also known as demand pricing, surge pricing and time based pricing. The price will fluctuate depending upon how much demand there is for the product. This pricing strategy is used a lot by power companies, airlines and hotels.
- Keystone pricing - you add a flat 100% mark-up to all of your products.
- RRP - if you are reselling products, you may be given a recommended retail price to sell them at.
- Margin -if you want to earn a set margin per product, say 35%, then there is a formula you will need to use: Margin = (Sale Price – Product Cost) / Sale Price
- Value based pricing - this is when your pricing is based upon the level of value that your customers sees your product providing. For instance, your actual costs for a product are low, but because customers see a high value in your product due to scarcity or just how good your product is, you can raise the price of your product.
- Bundle pricing - will you sell multiples of the same product for a discounted price? Or sell products which can be used together for a discount, such as a bowl and a spoon?
- Loss leader - this is when you promote and sell a product at or below cost price, with the aim of selling other products in conjunction with it. This is generally best in physical retail stores than online. It is good for helping new businesses get established in the market and gives the opportunity to demonstrate the benefits of becoming a regular customer of the business. This is not a long term sustainable pricing strategy.
- Psychological pricing - the numbers you use in your pricing can help buyers feel less pain about parting with their money. When a price ends with a 5, 7 or 9, there tends to be more product volumes sold. Psychological pricing can also occur when you put an expensive product next to the one you are wanting to sell, change the colour, font or size of your pricing and make an offer such as 'buy one, get one 50% off.'
- High-low pricing - here a business will initially sell a product at a high price when first released on the market. Then as the product becomes less relevant and there is less demand for it, they then lower the price. Seasonal products such as clothing or Christmas trees are examples of two products which have high-low pricing, with end of season or clearance sales occurring.
- Skimming pricing - similar to high-low pricing, skimming pricing starts with a high price, but then lowers the price over a long time period. Products that this pricing strategy is used for include laptops and gaming systems.
- Geographic pricing - your products are priced according to their geographical location or that of the customer. For example, different prices for customers based on their postcode, region or country.
Identifying Your Wholesale Price
Your wholesale price is what you sell your products to other retailers at. They then mark up their purchase price to become their retail price. Traditionally the wholesale price has been 50% of the RRP, or recommended retail price. To work out your wholesale price though, you need to calculate the cost of goods manufactured (COGM). The COGM is the amount it has cost you to make or buy the product. It is worked out by:
Cost of materials + cost of labour + overheads and additional costs = COGM
Remember though, you still need to make a profit on your wholesale price too, and a good number to aim for is 50%. It can be a balancing act to work out a wholesale price that is still low enough that a reseller will make their 50% profit and that customers will be happy with the RRP.
For more information, we suggest you read the article Pricing and Margins by Website World's CEO Reuben Jackson.