Product pricing has a considerable effect on the success of a business, so getting your pricing right is important. Determining an effective pricing strategy can take some work. Still, with the right information and some trial and error, your prices will have products flying off the shelves while also generating increased profits for your business.
Understanding All Costs Associated with Products
The best way to get an idea of the correct prices for the products you’re selling is by first understanding the costs associated with that product. You’ll need to take both materials and labor into consideration, as well as manufacturing overhead.
- Direct Material Costs: Direct material costs include those of the raw materials and parts that go into making your product. For example, if your business sells cookies, the ingredients for those cookies would be direct material costs.
- Direct Labor Costs: Direct labor costs include insurance, benefits, and wages for the employees responsible for manufacturing your product (the bakers in our previous cookie shop example).
- Manufacturing Overhead: These costs include any factory-related costs (the cost of machinery or the operation thereof), as well as indirect costs like indirect materials and indirect labor.
You’ll also need to take into consideration both variable and fixed costs to your business when pricing products.
- Fixed Costs: Fixed costs are predictable and occur on a regular basis. They include rent for any warehouses, property taxes, salaried employees, and utilities (though utility costs may change, especially if your business includes manufacturing).
- Variable Costs: Variable costs fluctuate, typically based on production levels. Examples of variable costs include direct materials, other production supplies, wages for any hourly or seasonal employees, and shipping costs.
Investigating the Market
Once you know the cost of making your products, you can determine how to price them. To help you zero in on a price, take a look at your competition. Competitor pricing is a good reference and can give you a look at trends in the value of your product. There are a number of tactics when it comes to competitive pricing:
- Below Competition Pricing: Pricing your products slightly below your competitors is a great way to attract more customers to your business and can result in a higher number of sales. Close monitoring is required to maintain below competition pricing while still ensuring your business profits appropriately.
- Parity Pricing: Parity pricing involves matching the product price of your competitors. This option is great if you have an established customer base or if your business has something that will make it stand out from the competition in the eyes of customers.
- Above Competition Pricing: Pricing your products above your competitors is a risk and should only be considered if your business is a market leader or has other qualifications to warrant a higher price.
Psychology Options for Pricing
There are a few strategic pricing tips and tricks to keep in mind. Studies have shown them to be an effective way to increase sales, as they make the customer feel compelled to complete their purchase.
- Weber’s Law: A great tool to use when raising product prices, Weber’s Law states that the point at which a change in something is noticeable is proportional to the size of the original item. For example, if you held in your arms a 10-pound bag of sand, adding another handful of sand to the bag would most likely go unnoticed. However, if you were to add ten handfuls of sand to the bag, you would definitely notice the difference. When it comes to pricing, a difference becomes noticeable at about 10%. This means customers are less likely to notice and more likely to accept price changes below 10%.
- Price Anchoring: Often used to appeal to customers’ desire for a good deal, price anchoring involves presenting buyers with a piece of information that can be used to make later judgments. For example, presenting a customer with a product and then showing them similar products for a higher price reinforces the customer’s belief that they’re receiving a good deal on their items.
- Precision Pricing: While it may seem that having nice, neat round numbers on your product’s price may draw in customers, the opposite is actually true. Using precise pricing, like odd numbers or decimals, is a simple way to change your customer’s perception of the price of an item. Pricing an item at $29 dollars creates a more believable price for customers as opposed to listing an item for $30 and can drive sales higher without losing much profit.
- Simplified Pricing: Changing the way you list your prices is another easy way to appeal to your customers. While it may seem far-fetched to think that the number of syllables in a price when spoken out loud can affect a customer’s perception, the Journal of Consumer Psychology found just that. For example, listing a product at $1,298.99 is less appealing to potential consumers than $1299, simply because the price with the fewest syllables presents the greatest value in the customer’s mind.
- Variety Pricing: If your business sells a number of similar products, it may seem smart to price them all the same for simplicity’s sake. However, you may want to add more variety to your pricing if you want to make sales.
Testing Your Pricing Strategies
Trying different strategies will help you find the pricing that’s beneficial to both you and your customers. You can also test promotions throughout the year to determine if they help increase your sales. The best pricing practices for your business can be determined only through informed trial and error, so don’t be afraid to take chances on different strategies.
Final Thoughts about Pricing Online Products
Pricing the products you sell can be difficult at first. Luckily, with a few tips and tricks, you can get a good idea of what will work best for the products you wish to sell. With effective pricing, you’ll have healthier profit margins and loyal customers. Repricing software is a great tool that’ll help you manage prices automatically and keep your products visible and competitive.