Ecommerce: How to Price Your Products
Are you aware of the 4Ps of marketing? The four most vital principles are Product, Promotion, Place, and Price for any business model. Let’s consider pricing. You must be knowing how sensitive your market is. It affects the correct pricing of the product. Price them too high, and no one buys them. Price them too low, and you don’t make enough money. The ultimate goal of any business is ROI (return on investment) that would allow businesses to make a profit.
This is why you should know how to price products to make profit.
Put all those costs together, and then look at them on a per-product or per-item basis. What is the cost per item? Once you know that, choose a higher price, and the difference between the two makes up your profit.
You must make enough on the sale to earn a profit. Start from doing the math. Depending on the product, these costs can include:
- Delivery of products, storage cost, production
- eCommerce site support and maintenance, hosting, extensions and plugins
- Shipping, if you don’t charge separately
- Other business expenses, like licenses, permits.
If you can lower any of these costs without sacrificing service, you can make more profit or lower prices and keep your profit. But if costs go up, you lose profit.
Put all those costs together, and then look at them on a per-product or per-item basis. What is the cost per item? Once you know that, choose a higher price, and the difference between the two makes up your profit. This pricing method is known as cost-plus pricing.
You can use other methods of product pricing:
- Value-based pricing
- Competitor-based pricing
- Dynamic pricing
But the cost-plus pricing methods is simpler. It helps to plan your profit.
Those are the basics of pricing. And you may see a few challenges already.
What affects how you price products?
Many merchants begin with this question: How much should I mark up my prices?
You have to make money. But if you mark up the price of a product too high, you might scare everyone away. Also your price can’t be significantly higher than most of the competition.
Pricing becomes complex when you start considering other tough questions.
For instance, what is the purpose of this product in your overall business strategy?
For example you’re selling what’s known as a ‘loss leader.’ You sell one product and actually lose money on it, on purpose. But, you do this to win a customer over so you can sell them other products later and make big profits.
You need a product to become your money maker that supports the loss leader. You will price such products very differently.
In another case you can sell a staple product that makes profits based on volume. Changing the price by a few cents can lead to big revenue growth.
But the main question to think about is, why do people want to buy your product?
Why do people want to buy your product?
It is good if you already know the answer to this question. But it is important question, because the reason people want your products plays an enormous role in how much you can charge for them.
What you don’t want is to get caught up in a race to the bottom. Trying to compete by offering the lowest prices is a losing approach to many businesses and profits.
Thankfully, most consumers don’t use price as their primary filter for deciding which products to buy. People buy for many reasons besides price:
- Fear of missing out – I want this because everyone is talking about it
- Values – this product says something about my values or beliefs or passions
- Identity – this product expresses something about my identity – cultural, religious, business, social, gender, etc.
- Desire – I want it because I just want it
- Meets a need – I must have this product to meet a need in my life
- Security and privacy – I want this product because it protects me, my family, or my possessions (in other words we talk about fear).
The key to pricing is knowing your audience.
Why does your audience want your product? What does it offer that nothing else offers? And how much is that worth to them?
The point is, people will pay more for a product if it resonates with these sorts of motivations. These matter more to them than just paying the lowest price. But it doesn’t mean that you can price a product as high as you want.
Once you settle on what you think is the ideal price for a product, make it a bit higher. You’ll help your profit margins, protect against inflation and surprise expenses.
Product pricing tips that help you to achieve business success
With all that in mind, here are a few specific tips and strategies you can use when figuring out how to price your products.
Don’t sell yourself (and your products) short
Don’t let pricing stress you out and don’t try to compete with everyone else. Calculate your costs and set a sustainable margin. Then, highlight the benefits of your products and how they serve your customers. Focusing on your audience is the best way to command higher prices and protect your profits.
Use ‘power of 99’ smartly
You can sell products at $110, but you could try selling them for $99 plus free shipping. You’d make a little less profit per sale, but might sell more volume.
Free shipping is one possible ‘smart’ use of free, though it can also cost you if you misuse it, so be careful.
Offering a free gift with purchase is another smart approach. The customer still gets something free that motivates a purchase, but you aren’t giving things away for nothing.
Use ‘buy now, pay later’
The idea here is to spread out payments to make cost more manageable for your customers. Buying in installments is a similar concept.
Don’t cut prices when times get hard
There is no evidence that cutting prices during hard times will sustain your profit levels, your business, or your ability to pay your employees.
If you continually offer discounts, customers begin to expect and even demand them. You don’t want to fall into that trap.
Use coupons smartly
If you choose to use coupons, use them wisely. Here are some good reasons to use coupons:
- Attracting new customers
- Reducing inventory of a certain item
- Giving back to the community
- Celebrating a holiday
Increasing your average order size, as done with offers like ‘save 20% on orders over $100’
It may take a little time to figure out the perfect number. So be sure to keep in touch with your customers and keep an eye on analytics to know what’s going well and what you might want to change.
How to price commodities
Consumers have access to millions of products with similar features. Think about flash drives, tablets and fitness trackers. These products were a breakthrough years ago, but they lost their uniqueness and became a part of daily life as many other products like toothpaste, fruit juice, and toilet paper. When that happens, the only option left for manufacturers is to compete on price.
It’s a hard problem to overcome, and hardly limited to a company or a merchant.
To make matters worse, customers develop low expectations and grow disengaged. They fixate on price and lose interest in marketing communications and all but the most radical innovations.
You can stop selling these products. Big corporations like Walmart or Lidl can sell these products better than small or medium businesses. You can start selling luxury products, “organic” products, unique products instead of selling commodities.
Also you can try using these pricing strategies:
Strategy 1: Use price structure to clarify your advantage
The first way to use pricing to diminish price sensitivity is to make it call attention to the value your product or service delivers, and ideally to the one dimension that most meaningfully differentiates it from those of competitors. To achieve this you must revise your pricing structure.
Goodyear priced its various models on the basis of how many miles they could be expected to last rather than their engineering complexity; this highlighted the advantage of those innovations for customers and taught them a new way to compare offerings that was perfectly aligned with the company’s value proposition.
Strategy 2: Willfully overpricing to stimulate curiosity
Willful overpricing can make customers pay attention. The overpricing also evokes a more passionate response to the products, which lead to a willingness to pay much more than they originally intended. Ever wonder why Apple computers are always priced at a premium? Or perhaps you’re familiar with SKF, the leading global supplier of bearings, which continues to command a 30% to 40% premium despite stagnant industry growth and the entry of several low-cost alternatives from emerging-market competitors. In fact, there are many cases demonstrating the thought-provoking effect of moderate overpricing—that is, setting prices higher than what customers normally intend to pay.
Strategy 3: Partition prices to highlight overlooked benefits
A third thought-provoking strategy known as prince partitioning is to break a price into its component charges. Presenting a cost as a set of smaller mandatory charges invites closer analysis and therefore increases the likelihood that a customer will revise a routine consumption behavior.
People are unlikely to factor a benefit into their choice unless an explicit charge is made for it. But partitioning succeeds only when it primes customers to see a real benefit they would otherwise have overlooked.
Strategy 4: Equalize price points to crystallize personal relevance
A final strategy for turning price sensitivity to your advantage applies when customers are asked to choose among several options designed to appeal to different tastes. This is an atypical approach to pricing customizable offerings. Usually, different prices are set for the different options on offer. The practice suggests that in such cases all the variants should be priced the same, because customers will then be compelled to discover which option best suits their needs. They will work to fully appreciate the range of options a seller is offering, not to find ways to shed features for a lower purchase price.
These strategies call for pricing in a thought-provoking way. Challenging the customer to ask “What am I actually paying for?” and “What aspects of this offer do I really need?” begins to revive the conversation between buyer and seller.
It might be complex and most critical in remaining in a race with competitors. But you are suggested not to stress unnecessarily, stay calm and refrain yourself from comparing yourself to others. Further, today the concept of doing business is related to customer delight and retention. If you want to conduct a business it must be customer-oriented. Survey what they want and decide how to strategize the pricing process.