There are different ways to establish the price of a product. Know more about product pricing and the basic pricing strategies here.
One of the secrets to high sales and ROI is a good pricing strategy. Companies use different product pricing techniques to enhance their sale, recover costs, boost reputation, and of course, gain more profit. People generally know pricing as the charging of price on products or services a business offers. Unfortunately, pricing is not that simple; it is a complex process that requires extensive evaluation.
If you are planning to set up a business online, here is a comprehensive guide to help you with product pricing.
Basic Rules of Product Pricing
Before setting a price, identify first the costs of your business. The cost shall cover all expenses, from manufacturing, distribution, and the cost of running the business. The sales of the product must at least cover all the costs the business accrued. If the sales fail to recover the sunk cost, you will exhaust the business’s financial resources and eventually go into bankruptcy.
The principal rule of pricing is to ensure the prices must cover the costs and profits. Aside from the costs, make sure to treat profit as a fixed cost. In this manner, you can ensure the ROI.
The most effective method to circumvent high pricing is lowering costs. If your business is fairly new, make sure to utilize raw materials at lower costs. Likewise, review prices regularly. Reviewing helps you keep on track of the market’s dynamics on cost, demand, and competition. You may use the data you’ve gathered during the review on product pricing.
Different Pricing Approach
Generally, there are five pricing strategies. Each one of these strategies is unique and suitable for certain business conditions.
#1 Cost-plus pricing
The most common type of pricing is cost-plus pricing. It is simply calculating all the costs and adding a mark-up. This strategy guarantees sunk cost recovery from the sales. However, if the business won’t recover the costs from the sales, it may entirely affect the company’s cash flow.
#2 Competitive Pricing
This pricing approach sets a price based on what the competition in the market charges. For example, if all the competitors sell a particular product at $ 50, your business must follow their pricing. This type of approach is common among commodity products.
In this approach, the market leader or the major market player will set the price. Smaller companies in the same market follow the pricing set by the market leader.
#3 Value-Based Pricing
Value-based pricing is charging prices on products or services based on how much the customers believe the goods are worth. Value-based pricing works best in skilled services including, painting, tailoring, and more.
Price skimming is often seen in industries where businesses always launch new products. It is setting a high initial price and gradually lowering it when competitors introduce new developments. Also, price skimming is applied to make consumers familiar with the product. Apple iPhone and Sony PlayStation are two companies that use price-skimming.
#5 Penetration Pricing
It is the technique of setting low prices on products to enter the market and raising it later as the market evolves. It is the complete opposite of the price-skimming approach.