“How much should I charge for my products or service?” Product pricing is a dilemma faced by nearly all businesses and eCommerce entrepreneurs. Ask too little for your product or service, and customers immediately jump to assumptions of poor quality – not to mention the low-profit-margin. Ask too much and you risk losing customers to more competitively priced products. So, how do you remain attractive to your target population while maximizing your margins? Read on.
Numerous industry leaders agree that pricing your products is part science and part art. The latter includes psychological techniques such as the ‘The Rule of 100,’ ’Bundle Pricing,’ or ‘Charm pricing.’ However, this post will focus more on the scientific part (1st Bonus Tip: After using science, you can incorporate the psychological techniques to increase your competitive advantage). How do you arrive at the optimal price for your product? We have simplified the daunting process into 3 simple steps.
Step 1: Determine the Base Price
You’ve got to start somewhere. How do you determine the initial price of your product? Sounds complicated and technical, right? The good news is that there are numerous pricing options at your disposal thanks to decades of learning and thousands of pacesetters to emulate. The trick lies in knowing which is the best pricing model for your business. Below are 3 of the most common and arguably the most effective pricing model for eCommerce entrepreneurs or ‘brick and motor’ businesses.
- Time-based/Demand Pricing: How much are the competitors pricing their products? How much are the consumers willing to pay? Under the market-oriented pricing strategy, you research into your particular industry to determine the product pricing of similar products and services. Depending on your offering, you can either match the competitor’s price, offer a low price, or overprice – depending on the quality, costs, and consumer preferences.
- Cost-Based Pricing: In a nutshell, cost-plus pricing involves adding a mark-up (usually a percentage of the break-even) to all your incurred costs. Calculate all the direct and indirect costs spent developing your service or product – consider the overhead, labor, and material costs. But how do you determine the level of mark-up? Through market knowledge or industry norms. For example, the retail industry often markup their products at 50% of the break-even. However, ensure that your total costs are no too high – consider trimming them before adding a mark-up.
- Dynamic Pricing: As you can tell from the title, dynamic pricing fluctuates in tandem with the market demand. The price is adjusted relative to consumer purchasing habits. Dynamic pricing is often used by eCommerce businesses such as Amazon to maximize prices. If you own an eCommerce business (dropshipping, freelancing etc.,) there are numerous price-tracking tools on the internet such as camelcamelcamel, Splitl, and Omnia Retail. They help retailers to maximize returns, drive profitable growth, and save time by automating optimal pricing.
Step 2: Tinker with your Pricing
Always test the waters before you cash in all your chips! This is a mantra that should apply to all businesses and eCommerce stores unless you are an extreme risk taker. In the context of pricing a product, ‘testing the waters’ involves utilizing the microeconomic concept of price elasticity. So, what is price elasticity and how can you use the concept to maximize your profits?
Simply defined, the price elasticity of demand (PED) measures the responsiveness of consumer demand after a change in price (i.e. PED= % change in Quantity demanded/% change in Price). What happens when you lower/raise the price? What is the optimal mix of demand and price? (2nd Bonus Tip: There is a common misconception that lowering price to attract more consumer will automatically increase revenue). Lowering product prices may result in profit maximizing, but when done strategically.
Consider the following example:
As shown in the figure above, different prices attract different sales volume (demand). Tinkering with price elasticity of demand allows you to determine the most optimal price range for your product or service. In the example above, the most optimal price is $30 ($1200 sales revenue). However, the lower prices of $20 and $10 have a significant number of customers. How can you capitalize on this consumer base to boost your earnings? There are numerous techniques such as anchor pricing, loss-leader, and discount pricing.
Step 3: The Going Concern: Does the Pricing Model meet your Long-Term Goals?
So, you’ve determined your base price and experimented with your pricing to arrive at an optimal number, isn’t that all you need? Unfortunately, your work is not done – you still need to analyze your performance and design a plan to ensure the long-term profitability of your business.
Develop an ideal mix of pricing strategies by staying on top of the current market trends – constantly calculating your overhead costs, utilizing promotions/seasonal discounts, and increasing the price of your best-sellers. These strategies will help you to gain a competitive advantage in the wild eCommerce marketplace, which is tipped to get even wilder in the near future. A 2018 report by PWC estimates that worldwide eCommerce sales will experience an 18% increase by 2021 to reach $4.878 trillion compared to current sales of $1.845 trillion.
As you embark on your quest to determine the best pricing model and facilitate the long-term profitability of your eCommerce business, keep in mind that it’s not an exact science – it may take a while to arrive at just the right amount of charges. Moreover, it’s an ongoing process that can be improved through due diligence and practice (practice makes perfect).