Economic theory states that price is determined by the interaction of supply and demand. The main component of supply is cost, and the main component of demand is the price. Working together, they constantly adjust to each other.

In order to survive and expand, companies must set a commodity price that will ultimately cover the overall cost of production and allow for a normal or adequate return on capital employed.

In this article, we will shortly review the pricing principles, how to set the right price for your products.

Are you ready? Let’s go!

Pricing process 

In the case of a company with a long production cycle, production capacity and production volume are first estimated and fixed costs are added, plus overheads. A supplement to the total production costs is added to allow a “fair” return on the capital invested. This add-on, or “surcharge,” can vary widely.

The “cost and surcharge” method of pricing is usually inflexible in terms of demand, but it’s very popular because it is extremely simple. As demand grows, adding a higher “mark-up” would give the company a higher profit. 

Price determinants

There is no simple formula to make a price decision. The factors described below that interact with each other need to be considered.

Economics. The economic environment is an extremely important factor, such as monopolistic, competition in which a company operates.

Users. To know how many goods can be sold in a given period at a certain price, it is necessary to know well the elasticity of demand for the product. It should not be forgotten that the reaction of buyers to the price is not determined solely by economic factors.

Competitors. When setting the price of a product, it is necessary to anticipate the actions of competitors, which can be said to lead to a price cap. A below-market price will only bring a temporary increase in sales. Competitors can also lower their prices.

Expenditure. The impact of production on costs and profits needs to be taken into profit.

The final choice usually depends on the reaction of the buyers – how much they will pay for the better quality, how long the differentiation will last. 

First, there’re things to consider before pricing your products

Before starting to price your products, you need to know what your business expenses are. You should figure out what all your expenses for the next few months will be. 

Here are some costs to check out: 

  • Contractor, employee salaries, your salary
  • Shipping cost
  • Marketing, advertising cost 
  • Your website fees
  • Emergency fund
  • Monthly fees 

Impact of the duty on the price

Export pricing is complicated by long distance to the consumer, exchange rate fluctuations, government policies (such as customs policy). 

Here comes highlights of pricing:

1 Cover your back! 

Always make sure you’re setting prices that cover your costs, otherwise, you’ll be running your business at a loss! 

Remember, this is the main rule to keep in mind as you go forward and start pricing up your products.  There’s no reason to sell your goods cheaper than anyone on the market, if you can’t afford to keep your business running. 

2 Understand the market 

Whatever you’re selling, you must to to identify customer expectations, segments, needs, and behaviors. It can be carried out as part of market research or user research. You need to know how much your customer will pay. Also as well as how much competitors charge.  

Try your best to find information from customers on what they really looking for and the prices they find fair and the prices that they are repulsed from.

We all know a lot of people love shopping. Did you know you shouldn’t price your items too low? Because shoppers like to know they’re getting value for their money. So, super cheap prices can make customers suspicious, let them believe that your item is mediocre. 

Of course, talk to your customers regularly to make sure your prices remain optimal.  

3 Analyse competitors’ products and prices

Although the maximum price can be set on the basis of demand and the minimum on the basis of costs, when a company sets the average price range, it is influenced by the prices of competitors and their reaction. 

You can buy competitors’ items and compare it. Knowledge of a competitor’s product can be used as a starting point in setting your prices.

Knowing the demand curve, the estimated amount of costs, and the prices of competitors, a company can determine the price of its product.

4 Set value-based price  

Value-based pricing is a strategy of setting prices primary based on a customer’s perceived value of your product in question. The basic idea is to set a price that’s based on what your customers are willing to pay. 

Important: for brands to develop a successful value-based pricing strategy, they must invest a significant amount of time with their customers to identify their wants.

OK, how to set up value-based price? 

Here are the steps: 

  • Identify your customer’s ‘second-best option’. Think if your customer can’t buy your product, then what they should choose?
  • Then find out the price of the ‘second-best choice’.
  • List all the ways why your offer is better. Estimate how much you think these differences are worth to your customers.
  • List all the ways that the ‘second-best offer is better. Be very honest here. So, how much do you think there are worth to your customers?
  • Finally,  calculate the best price! 

Examples of value-based markets

Popular name-brands command higher prices based on consumers’ perceptions of how the brand affects their image. Also, if brand can persuade an A-list celebrity to use their product, the perceived value of the associated brand can suddenly skyrocket. 

However, when a brand’s image goes down for any reason, the pricing strategy tends to re-conform to a cost-based pricing principle.

5 Psychology pricing

Psychology pricing encouraged shoppers to make a purchase decision based on an emotional trigger rather logical. 

Have you ever wondered why the most prices are set on $9.99 instead of rounding it up?  Well, there comes a reason – customers usually pay more attention to the left-hand number rather the numbers after the decimal. So the number $9.99 looks definitely better than $10. This method will drop it into the lower price band and potentially increase its sales.

Objectives of this method:

  • Those prices appear lower to the buyer
  • Those prices show a kind of discount to buyers

6 Don’t stop! Keep testing pricing strategies 

Price testing is exactly what it sounds like, it means testing different prices for your products. Instead of using optimization tools, you let the customer vote for the best pricing with their dollars. 

It’s natural to take a lot time deciding on your launching price. Pricing a price will give you a better idea of how your customer responds to your pricing strategy. Pricing reflects your brand and your target audience.  

All in all, it’s the best method to determine how to price different tiers of products to sell the most product with the highest profit margin. Remember, set your goals, identify your target groups, complete incremental changes, analyze the results and have the right software to support you whilst testing. 

See you soon,
Team Dropton

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