Whether you are setting up a retail store or doing business, or you want to set a price for your product in your company, what are the criteria for determining the final selling price of a product?
I used this question to ask around who opened a shop. After combined the answers, I have concluded that the majority seem to perceive that as long as the selling price is higher than the cost price and on par with market price (the norm price that competitors are selling,) it makes sense.
What if you do not have a reference pricing?
How can you come out with reasonable but profitable pricing that welcomes your target customer? Here are the six essential tips for finding the best prices and smart discounts for your products:
Two conventional pricing methods to find the basic price
If you have no clue about the subject of pricing, the fastest way to learn is to imitate the practices of others and use the industry knowledge that has been tried and tested to determine the most basic methods.
Cost-plus pricing
It is the most basic and most commonly used pricing method. The concept is simple,
The cost of goods x cost markup = final selling price.
The cost markup = 1 + markup percentage.
For example, your product costs include:
$ 20 for materials + $ 10 for personnel + $ 8 for indirect costs = $ 38.
If the markup percentage (the difference between the retail price and the cost of the product) is 50%, the reasonable selling price algorithm should be,
$38 x (1 + 50%) = $57.
Market-oriented
This pricing law is based on competitors as reference objects and achieves different sales purposes by setting higher or lower prices than the other party.
If the price is higher than the market, you are telling customers that your products are better quality than others, and hence a better value proposition.
On the other hand, when you adopted the same pricing on par with the market, your goal is just to stay competitive and maximize profit.
Selling lower than the market price is commonly used strategy for countries with matured supply chain that goods are accessible for both supply and demand sides and the strategy is to sell more to compensate the lower margin.
Retailers are free to adopt any strategy mentioned above with the calculated advantages and disadvantages that they can manage.
The key takeaway is to avoid setting the product pricing higher than your competitor while the quality of the product is inferior. It is easy for the consumer to notice it criticized your brand on social media.
Four types of discount and price increase strategies
After you have set the baseline for your product, it is important that you stay informed with the pricing fluctuation by the reaction from the competing market. While your price to maximize your profit, you should try to mitigate the negative impact that causes by cost-performance ratio or CP ratio.
How can it be done without instigate negative sentiment on your customer?
Loss-leader pricing
Sometimes the retailer will offer substantial discounts to certain products with very thin or no profit margin or even a loss. Yet, the customer will still suspect that the retailer will not lose money despite the irrational low price.
So what is the trick?
The reason is simple, relying on this product to attract footfall to the store, since they are there they are more likely to purchase other products that have a profit margin. In short, it is to sacrifice profit on selected products by compensating with the sales from other products.
Stores should plan meticulously by grouping the product bundles and target group to boost the demand. For example, assuming that the loss-leader is toilet paper, and the target group is set to homemakers, then the products (such as bathroom and kitchen supplies) that homemakers will buy are also discounted together. By scarifying the profit margin for the loss-leader product, the overall strategy will boost sales for the stores.
Anchor pricing
Give consumers an estimated price first, and then mention a lower actual price which caused a "really cheap" psychological feeling. For example, when Steve Jobs announced the cost of the iPad, he first told everyone that, according to market experts, the price should be less than $1000, and the word $999 appeared on the screen. Then Jobs announced that the iPad wouldn't be that expensive, only $499. This is a good example of the anchoring effect.
Dynamic pricing
In order to maximise profits, some companies will change the price of their products following market supply and demand or consumer habits. For example, when Uber calls for more cars, the price goes up. And Amazon (Amazon) also increases the rate of hot-selling products during the shopping festival to increase profits.
However, although dynamic prices can earn you a lot of income, it is often criticized by consumers for "loot a burning house". It is a tactful pricing strategy that needs to implement with care.
Increase only the price of best sellers
You can consider increasing the price for the best-selling products to boost the total revenue so that it can make up for the slow-moving products. You may be thinking if I am contradicting the Dynamic pricing strategy?
Actually it is not. Dynamic pricing is aimed to increase pricing for short terms in order to respond to supply and demand. And it is usually a few hours before reinstate the original pricing.
This refers to a long-term increase of the pricing, and consumers will not think that they have been "loot a burning house".
You can also consider repackaging the product or some bundled goodies to increase its value and make the price increase reasonable.