Knowing how to price products is an important skill to have when working in manufacturing or retail. Choosing the right price involves finding a balance between attracting customers while continuing to make profits. In this range, learning about different product pricing strategies can help you set a fair price that attracts customers and increases sales. What is the concept of pricing products and their strategy? The answer in the rest of the article, just read on.
What is the pricing of products?
Product pricing is the process of determining the sale price of a product or service that takes into account all the costs associated with its production and sale, as well as what customers want to pay. The pricing of products must be intended to match the value of the product or service to its cost and customer's demand so that the company can maximize profits while providing competitive prices.
Product price determinants
Several factors work together when determining the price of products, which must be taken into account, among which are:
1. Overhead costs
Includes all expenses related to producing a product or providing a service, such as labour costs, marketing/advertising costs, and shipping costs.
2. Competition
What are other companies' fees for similar products or services in the same market? Companies must consider their competitors' pricing structures when determining the prices of their products and services.
3. Price sensitivity (demand flexibility)
How sensitive are customers to price changes? If demand for a product or service falls significantly as the price increases, it may not be profitable to collect more
4. Value Display
The value of the product or service must reflect its price, and companies must take into account the additional features, quality, customer service and brand value that the customer acquires when buying his products or services.
5. Pricing Strategy
There are many different strategies to consider when determining the price of products and services, companies must determine the most appropriate strategy based on their objectives and market conditions
6. Product complexity
Businesses with complex products (for example, programs with multiple features) may need to consider different pricing models depending on the complexity of their products, for example, subscription-based prices or pay-as-you-go plans may be suitable for software products.
How to price products
Setting the price of your products is one of the key decisions you should make, as this affects almost every aspect of your business, and in this regard you should learn there are three steps to calculate a sustainable price for your product:
1. Collect your variable costs
An effective product pricing strategy depends on understanding your costs, if you order products, you will get a clear answer about the cost of each unit, which represents the cost of the goods sold. If you make your products, you will need to look deeper and look at a range of raw materials, labor costs and overhead costs, thus asking these questions: What is the cost of this kit, and how many products can you make from it? This will give you a rough estimate of the cost of goods sold per item.
2. Profit margin
After you get a total number of your variable costs for each product sold It's time to add profit to the product price, for example, let's say you want to make a 20% profit margin on your products plus your variable costs. When choosing this ratio, take your total variable costs and divide them by 1 minus the required profit margin expressed in decimal place. For a 20% profit margin, this is 0.2, so you have to split your variable costs by 0.8.
3. Fixed costs
Fixed costs in pricing products are the expenses you will pay whatever the circumstances, they remain the same whether you sell 10 products or 1000 products, which is an important part of your business management, the goal is to be covered by your product sales as well, when choosing a price per unit, it can be difficult to know how your fixed costs fit, which is why testing different price points is key.
What strategies exist for pricing products?
As mentioned in the factors, a range of different strategies have been taken into account when determining product prices. Here are some different strategies that you can use for pricing products effectively:
1. Cost-plus pricing
Additional cost pricing, also known as cost pricing plus profit, focuses On the manufacturing costs of the product to determine its price, companies typically determine how much they spent on manufacturing a product, Then you add a high price to make a specific profit, for example, If the furniture manufacturer spends $100 making a table and wants a profit of $100 you will raise the price by 100% and charge $200 of the work, If you wish to use this pricing strategy, ensure that all costs associated with product manufacturing are taken into account first, such as overhead costs, labor costs and supply costs.
2. Competitive Pricing
Competitive product pricing, or market prices, involves market research to determine a fair product price, and companies look at the current market rate of similar products to determine how much cost to pay for their products.
3. Hack pricing
Hack pricing involves companies introducing a new product to the market at a low price, companies may choose this product pricing strategy if there is too much competition in their markets, allowing them to attract customers at their lower prices to raise brand awareness, when customers see the value of their products, companies may raise their prices to be more competitive.
4. Dynamic pricing
Companies that adjust their prices according to current market rates and trends may use a dynamic product pricing strategy, and companies may change their prices several times throughout the day or week instead of choosing a fixed price for the season, making it a common strategy for companies that sell their products online, as they can easily update their prices.
Conclusion:
All successful companies recognize the importance of pricing products, and understanding how to price products effectively as mentioned can make a big difference to a company's net profits, bearing this in mind.
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References:
1. << Product pricing: How to determine the best price for your product >>, hackernoon.
2. << Pricing of high-tech products >>, business2community.
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