When it comes to learning how to price a product, the process involves a lot of trial and error, and it doesn't hurt to have a deep understanding of human psychology. No matter what type of products you sell, what you charge customers largely determines the success or failure of your business.
There are many different types of pricing strategies, each with its pros and cons. However, certain principles are common to all of them. The price has to cover both the costs of doing business and making a profit. To lower prices, you also have to lower your cost for things to balance out. Additionally, prices have to drive sales for your product launch to succeed.
After you set your initial prices, it's important to frequently review them. Take into consideration your current expenses, profit goals, and market demand. Along with all this, you have to constantly review your competitor's pricing and align your own strategy accordingly.
When should you adjust a product's price?
You should adjust the product’s price when you introduce it to the market. If you initially set the price low, you might want to raise it once volume increases.
However, pricing strategy is not a set it and forget it process. You'll also need to reevaluate your pricing if your costs change. If you lower your costs through economies of scale, you can charge a lower price or mark up the product to increase your profitability.
Do you know what prices your competitors charge? If not, that's something you should remedy as quickly as possible. In order to compete, you'll need a pricing strategy that matches your product branding. For example, you might decide to sell your product at a higher price to establish a premium brand.
In cases of inflation or recession, you may have to increase or decrease your prices accordingly.
What happens if you don’t price a product properly?
You can incorrectly price your product by charging too much or too little. If you charge too much, customers might feel that they have been taken advantage of and you'll suffer lower profit margins. However, if you charge too little you can impact the way that customers perceive your brand.
Here's a look at four scenarios where improper pricing can negatively impact your business:
Customer dissatisfaction
If you charge too much for your product and it doesn't live up to expectations, it can lead to customer dissatisfaction. In turn, this can lead to poor reviews that impact your ability to increase sales in the future. Make a list of other products on the market and what people pay for them. Determine where you want your product to fall, taking into account how the price changes will affect your branding.
Low profit margins
If you charge too little for your product, you'll barely cover costs and, therefore, suffer lower profit margins. You can prevent this problem by using cost-based pricing. With cost-based pricing, you will add your desired margin directly on top of your cost to set the price.
Low sales
Products that are overpriced do not sell well, resulting in low sales. Even if you're trying to establish your product as a premium brand, it's important to gain an initial following. This may involve temporarily lowering sales to increase your footprint.
Perception as a “bargain brand”
If you constantly offer your product for half price for deep discounts, it'll be looked at as a bargain brand. In this case, people will rarely pay the full price for the product. Therefore, it's important to avoid this mistake by pricing your product reasonably but not too cheaply.
When deciding on your pricing strategy, you'll need to take these factors into consideration.The right price covers costs, stays competitive, and nets a profit—follow these 7 steps to find that sweet spot.
For small businesses, success requires balancing what your customers want with what you need to make a profit. That's why strategically pricing your products is key. With the right prices, you can generate more sales and maintain a healthy bottom line.
Before setting the cost of the product, figure out the cost of producing products and running the business. Your total sales will need to cover these costs plus your target profit margin. If your prices don't cover your cash flow, you won't be able to stay in business very long. Keep reading to learn everything you need to know about increasing your prices.