Pricing is one of the key decisions every business owner has to make. What makes pricing different is that you, as the business owner, can change it in a moment. You can’t change the characteristics of your product without investing in innovation and research to get a new version or in finding a new supplier that has an extra to offer. You can’t change your product availability through the country’s geography if you just have some sellers or stores. But you can change your prices quickly. Actually, it is the purchase decision factor about which you have the most control. So I don’t think you are setting them randomly, are you? I’m going to teach you some pricing strategies so in the future you will be able to make this important decision in a more professional way.
There are four important factors in setting the prices:
- product positioning
Cost-based pricing strategy
The first strategy is just based on the first factor and it is known as cost-based pricing strategy. What you have to do to follow this strategy is to calculate the costs associated with your product, decide on a profit margin and add it to the costs, so you have the final price. Here are the issues related to cost calculation. There are some costs that are quite obvious, such us the purchase price you have to pay to your supplier. But there are others not so clear. For example, what proportion of your store rent is accurate for the cost of a single product? And what about your employees’ salaries? And the store cleaning costs? Let’s say you manage to calculate your costs and it is an amount of $100. Then if you want a profit margin of 100%, you should set the price at $200.
The problem with this strategy is that you are not taking into consideration the market prices (competition), how many people really want to buy the product (demand) and your positioning strategy.
Value-based pricing strategy
In this strategy you have to reach the balance between competition and demand. According to economic theory, this will be the real value of your product and its fair price. Not long ago there was just one way to discover this point of equilibrium – trial and error. A retailer started selling the product at a price and raised it at intervals, tracking the business profit variations related with the prices changes. Sadly this could take years and seriously harm to the business image. But now, with the power of big data, we can take competitors’ prices as an indicator. By using a price tracking software you can know the prices that most of your competitors are offering and take the average as a balance indicator.
This strategy is better than the first one, because at least you will be sure in the market. But we still think irrational behavior has something to do with sales. So let’s take a look at our next strategy.
Product positioning strategy
Let’s face it, humans are not as rational as we pretend. When it comes to pricing this is translated into a higher price means a better product, no matter the true quality of the product. But you can’t just raise your prices as if you were Apple. There are three common situations:
- Yes, you are Apple. Meaning you are well known in the market and most importantly, your product is unique in some way so you want to point out its uniqueness with the price. If this is you, assign a high price to your product.
- You are selling products that a lot of other stores have, but you are enjoying two desirable advantages: you have a very good traffic due to SEO or any other strategy and a nice conversion rate. In this case, by setting an average price you will have a niche margin with lot of sales.
- You are selling products that a lot of other stores have, but you are not getting any or either of the previous conditions (high traffic and conversion rate). In this case you have to be cheaper than the average and if possible, the cheapest one. This is because by being the cheapest, you will appear first in price comparison engines and of course you will raise your conversion rate.
Having a price strategy is a very healthy action to take for businesses of all sizes. Now it is easy and affordable, thanks to the software solutions in price tracking that we offer in Prisync. Do not hesitate to take the next step for your business’s success!