There’s a question that most side hustlers ask themselves when they are starting a business, no matter how small.
How do you determine the price of the product? You might think this is a simple numbers game, but it’s far more.
I’m not saying that the numbers aren’t important, but they are only one factor. You shouldn’t give your product a price before you fully understand the ramifications of that action.
The price of a product is far more important than many understand. Luckily for you, we do.
This week’s newsletter brings you:
- Trends – We’ve gathered some interesting statistics regarding current pricing trends.
- Strategies – This week, we will give you a full breakdown of product pricing strategies, including their importance, the different types, and three real-world examples.
- Tool of the Week – For your pricing strategy to be effective, you need to use a tool that allows you to analyze your strategy based on its performance. That’s why we present to you Competera.
Read on to wrap your head around pricing!
Trends
This week, we’ve gathered the latest available data on pricing. Keep reading to find out what features consumers are looking at when making a purchasing decision and why buyers select certain retailers over others.
Factors Impacting Conversion Rates
According to the latest available data at Smarter Ecommerce, brand popularity is the biggest deciding factor when a consumer makes a buying decision. People want to buy from brands they know, like, and trust. Interestingly, price comes in third when looking at the relative importance of each feature in predicting conversion rates.
Reasons for Selecting a Retailer
Now let’s look at reasons why consumers choose one retailer over another. According to Deloitte, great deals are actually more important that brand reputation! Interesting stuff.
Strategies
Let’s start this three-course meal with a discussion on why product pricing is so important for your success.
Why product pricing is so important
We live in a value-driven society, and pricing reflects everything you do as a business. From product development to a link to your website, nothing defines a company or a product better than pricing.
At its core, your product’s price is a combination of your effort and the monetary value of your product. The pricing point tells clients whether it is worth their time and money.
There are two things to remember about product pricing:
1. Everything comes second to pricing
2. Price optimization has a huge impact on increasing profits
Photo by Karolina Grabowska
Let’s dive a little deeper into why these two ideas are so important:
The price of your product
A business can do hundreds of different things, but there’s one thing that any hustler can tell you: businesses exist to produce value.
You’re combining your time and efforts with your ingenuity to streamline everything through the allocation of cash and capital.
Even if you’re a sole proprietor and your only employee, your company has hundreds of moving components, from sales and marketing to product and service fulfillment. All of these individual elements add up to creating value, and these are things you need to consider when you ask someone to pay for that value.
You must put a price on the value package you’ve developed. What is the value of your time, energy, and creativity? How much is your customer willing to pay?
Pricing is the exchange rate you apply, and everything else follows to support that exchange rate.
Your product teams create the right features for the right audience. Sales and marketing demonstrate how effective certain characteristics are for the correct audiences. Customers are guided through the purchasing process by UX professionals, ensuring that they do not churn. Support personnel keep the company running and customers happy by being dependable.
Everything in your company strives to translate and justify the value you provide for a price.
Pricing strategies affect profits
Now that we’ve discussed the purpose of price, let’s dig into the numbers.
Price has the greatest impact on profit maximization. Several studies have proven how effective pricing optimization can be. Michael Marn and Robert Rosiello, both senior price executives at McKinsey & Company, published the seminal study in the Harvard Business Review in 1992.
In a study of 2,463 companies, the dynamic pricing duo discovered that a 1% price increase results in an 11.1% increase in profits, whereas 1% improvements in variable costs, volume, and fixed costs result in 7.8%, 3.3%, and 2.3% profits, respectively.
When it comes to pricing, we are often so focused on optimization that we hurry to reduce costs or increase volume through creative marketing since these channels appear much more tangible and negotiable. These options work, but by dodging “the issue,” you’re missing out.
Pricing strategies – pros, cons, and examples
There are a wide variety of different pricing strategies that you can adopt. We’ve compiled a list of the ones we think are best.
Psychological pricing
Psychological pricing tactics use consumer psychology to make products more appealing by adjusting the product’s price, positioning, or packaging.
Setting the price at $9.99 rather than $10 is one psychological pricing tactic, as is offering a “buy one, get one free” promotion.
This tactic can be used by almost any business; however, it is most often used by retailers and restaurants.
For example, 90% of retail prices end in either “9” or “5”, and a restaurant may set the price of a gourmet hamburger at $12.95 instead of $13 to entice customers to purchase a product at what they perceive as a lower price.
Sales are a classic case of psychological pricing. Photo by Max Fischer
Pro: By significantly altering your sales strategies, you can sell more things while maintaining profitability.
Con: Some clients may regard it as shady or salesy, damaging your reputation or leading to lost sales.
Skimming pricing
A skimming technique is used by businesses that charge the highest price for new products and then lower the price over time. Prices fall as products end their life cycle and become less relevant. Price skimming is often used by businesses that sell high-tech or novelty items.
For example, a home entertainment store begins offering the most recent, cutting-edge television for significantly more than the market price. Prices then steadily fall throughout the year as newer products enter the market.
Pro: You can maximize new product profits while covering production expenditures.
Con: Customers may grow dissatisfied after paying more and then watching the price steadily fall.
Penetration pricing
A penetration pricing strategy can help a company enter a new market and gain market share. For penetration pricing to work, you must offer a significantly lower price than your competitors.
By doing this, you can attract new clients while depriving your competitors of revenue. Initially, you will lose money, but if you start raising your prices again, you can win new clients and turn them into loyal ones. Internet and smartphone companies use this strategy to increase their market share.
For example, a new coffee shop opens in town offering coffee for 40% less than the competition.
Pro: Market penetration is considerably easier than entering at a high price, and you can immediately acquire new clients.
Con: It is not sustainable and should only be used as a short-term strategy.
High/Low pricing
High/Low pricing is like skimming, except the price drops at a different rate. Rather than dropping gradually, a high-low pricing approach drops a product’s price dramatically all at once. Seasonal goods retailers generally use this strategy.
For example, a clothing store may charge a premium for women’s sundresses throughout the summer but then reduce the price once autumn approaches.
Pro: You can clear out your inventory by discounting and putting out-of-date things on clearance.
Con: Customers may wait for upcoming sales instead of paying full price.
Premium pricing
The higher the price, the greater the perception of worth, quality, or luxury. When customers recognize the brand and have a positive opinion of it, they are willing to pay more.
Premium pricing is used by companies in industries such as fashion or technology that sell expensive or high-tech products.
For example, a beauty salon establishes a reputation in its industry by charging 30% more than its competitors.
Pro: You’ll have bigger profit margins since you can charge significantly more than your production expenses.
Con: This pricing strategy is only effective if people perceive your goods to be high-end.
Competitive pricing
Based on the market, your competitive pricing strategy determines the price for your products or services. The pricing of all products in your industry dictates your business’ pricing, which helps you stay competitive if your business is in a saturated industry.
As long as the price is within the range set by all competitors in your line of business, you can price your products higher or lower than the market rate.
It’s worth mentioning that 96% of consumers evaluate prices before making a purchase, allowing you to gain clients with a price that’s somewhat lower than the market average.
For example, to attract price-sensitive consumers, landscaping companies compare their prices to those of local competitors and set them below the market average.
Pro: In a competitive market, it’s easier to maintain a market share by attracting customers willing to pay slightly less than your competitors’ rates.
Con: To maintain a competitive advantage for price-conscious consumers, you must closely monitor average market prices.
Bundle pricing
Upselling clients with extra products or adding value to their purchases is possible through bundling. Bundled pricing refers to two or more related products or services offered at a discount. Retail stores, restaurants, and beauty salons are some businesses that use this method.
For example, a burger shop can sell fries, soda, and burgers separately, but they offer combo discounts if you purchase a whole meal that includes all of these products.
Pro: Customers find new things they were not planning to purchase and may purchase them again.
Con: Because consumers save money on bundled purchases, products provided within a bundle will be purchased less frequently on their own.
Dynamic pricing
Dynamic pricing reflects a product’s current market demand. This price technique is particularly common when the product in question fluctuates daily or even hourly. Hotels, airlines, and event venues, for example, establish different prices every day to maximize earnings.
For instance, a boutique hotel raises its room rates for one weekend to coincide with a popular summer festival in town.
Pro: When demand is high, you can improve overall revenue by raising pricing.
Con: Dynamic pricing necessitates complex algorithms, which starting hustlers may lack.
Cost-plus pricing
Cost-plus pricing includes taking the amount you paid to create the goods and multiplying it by a fixed percentage to determine the final price. You can calculate your markup % backward by first determining how much profit you want to make on each product sold.
For example, a pizza restaurant calculates the cost of its ingredients and labor, then sets the pizza pricing to generate a 20% profit margin.
Pro: Profits are more predictable because your markup price is set to a predetermined percentage.
Con: If you set your markup percentage too high, you may lose sales if you don’t consider external factors such as the pricing of your competitors or market demand.
Real examples of effective pricing in the online world
It’s one thing to read about pricing strategies with general examples, but it’s another to see some big players implement these strategies. Let’s take a look at how some of the biggest industries in the world have adopted the strategies we’ve learned about:
Penetration pricing – Netflix
Netflix is the epitome of penetration pricing. People frequently complain about the increase in Netflix subscription costs or the expiration of their one-month free trial period.
Nonetheless, despite occasional complaining, individuals are prepared to pay increased membership fees for an endless stream of good media content. Today, Netflix is the market leader, accounting for 51% of streaming subscriptions in the United States. Other OTT platforms are following suit, and implementing penetration pricing to attract new subscribers.
Dynamic pricing – Amazon
As of October 2021, Amazon is one of the largest e-commerce platforms, with over 300,000,000 active users. Amazon uses the massive quantity of data acquired about customer purchasing behavior and market trends to modify product prices every 10 minutes. Amazon allegedly raised its revenues by 25% in 2016 using dynamic pricing tactics.
Bundle pricing – Microsoft
Microsoft Office 365 is one example. Word, Excel, PowerPoint, Outlook, OneNote, Publisher, and Access are all included for one low fee.
Bundle pricing at work.
This, once again, makes use of the heterogeneous demand effect. Most buyers would place a high value on one, two, or even three of those things and would be willing to pay a premium.
They would not pay as much for the other items. Bundling the products makes the package appear to be a good value regardless of the specific product(s) someone is interested in, and they spend more than if the individual things could be purchased separately.
Resources:
12 real-world pricing strategy examples by Fresh Books
Tool of the Week
Pricing solutions help companies develop, manage, and analyze their pricing strategies.
ERP and CRM solutions define product and service prices. However, pricing software offers flexibility that lets sales teams define customer-specific prices, discounts, and rebates.
Data analysis tools in pricing software measure the impact of pricing tactics on sales profitability so that businesses can increase their margins and transaction win rates. It’s possible to provide dynamic pricing to sales agents based on a specific selling scenario using pricing solutions.
Examples of common integrations are CRM, ERP, e-commerce, and CPQ. The purpose of pricing solutions is to connect with ERP or CRM, the main price data repositories, to let users communicate pricing with all parties involved in a sales negotiation (e.g., customers, sales managers, etc.).
Competera offers a market test and product tour on their website.
Competera Price helps retailers set and maintain reasonable prices with AI and machine learning.
With this ready-to-use tool, you can manage category pricing for any number of SKUs. Using competitive data, rule-based engines, and demand-based engines, Competera assists firms in achieving their strategic goals. You can use it online, offline, omnichannel, mono- or multi-brand.
Competera offers three key products that can work together or independently, depending on a store’s needs at each step of the pricing process.
Competitive Data, which provides real-time market data, Pricing Automation, which reduces repricing time by at least half, and Price Optimization, which boosts sales by as much as 15% and profits by as much as 8%. The price depends on how many SKUs are managed, deployment size, and product configuration.