If you think product pricing means only setting the amount of money you receive in exchange for your product, think again. Price is much more than just a number. It communicates the value of your product and can make or break your brand and reputation.
Price is the most important consideration for 18 percent of buyers, while it is among the top three most important factors for 47 percent of consumers.
Since this decision carries so much weight, coming up with your pricing strategy may feel like an overwhelming balancing act. If you want to make sure your business can attract customers, drive sales, and build a reputation, you need to pick the right strategy for your particular product. This guide will help you with that.
How to price your product
Before we move on to top strategies for pricing your products online, let’s start with some basic math. The first consideration when you are setting up a price is it needs to be sustainable for your business.
According to Shopify, here is how to calculate a selling price for your product:
- Adding up variable costs per product
Variable costs are all expenses involved in manufacturing your product and delivering it to the buyer. For example, if you are a drop shipper, this calculation is pretty simple:
- The price of the ordered product
- Marketing expenses
- Shipping expenses
On the other hand, if your product is created in a workshop, you have to consider more variables, such as tools, materials, logistics, and labor.
Let’s imagine you manufacture natural ingredient face cream. Each cream contains coconut oil, beeswax, shea butter, and perfume oil.
Of course you buy all of these materials in batches, but do you know how much you need for a single product? You can calculate per-unit cost by dividing the batch price by the number of products you can create from it.
You will factor in the labor by setting your hourly rate and dividing it by the number of products you can make in one hour. Let’s imagine it is 10 products per hour.
So, the final count per item would be:
Coconut oil 2.05 AED
Beeswax 4.50 AED
Shea butter 15.94 AED
Essential oil 0.94 AED
Packaging 15 AED
Marketing 2.75 AED
Shipping 20 AED
Labor 8.80 AED
Product price: 69.98 AED
2. Adding a profit margin
When you nail down the price, profit comes into consideration. Your profit margin is determined by your business goals and your industry. If you want to earn a 20 percent profit margin, turn it into a decimal and subtract it from one.
The final calculation will be:
- (product price) / (1-decimal profit margin)
In this case, it is
- 69.98 / (1–0.2)
- 69.98 / 0.8
- 87.47 AED
3. Adding fixed costs
Fixed costs include rent, various bills, subscriptions, and expenses you have to pay on a monthly basis to keep your business running, no matter how many products you sell. These expenses also may include warehousing, website maintenance, etc.
However, they are not as easy to calculate as variable costs and profit margin. In general, you can calculate the expenses and the number of products you need to sell to cover them. You can use that as a starting point for working fixed costs into the final price by performing a break-even analysis. Shopify has a great break-even analysis guide and calculator you can use here.
10 Strategies for Product Pricing Online
Product pricing does not end with basic math. Once you calculate the price, the final decision comes with another set of considerations.
Based on your unique selling proposition, we roughly can separate pricing strategies into two large groups: market-oriented pricing and consumer-oriented pricing.
With market-oriented pricing, your sole focus is on your competitors and industry benchmarks. With consumer-oriented pricing, you shape your price based on your target market’s needs and behaviors.
If you do some research, you will notice there are more than 30 types of product pricing. However, we decided to stick to 10 pricing strategies that are relevant to regional e-commerce businesses.
1. Penetration pricing
Penetration pricing is an aggressive, time-limited strategy that allows new businesses to enter the market by offering free or low-priced products and services. This strategy allows you to raise brand awareness and attract a customer base. A common example are mobile operators who offer free devices or discounted contracts to the first users.
It is recommended to new e-commerce businesses, but you should make sure this product pricing is sustainable for you. Attracting customers means nothing if you are losing money.
2. Economy pricing
Businesses using this strategy set prices and their profit margin at the bare minimum and promote it with minimal marketing costs. The gist of this pricing strategy is selling as many products as possible and earning profit based on sheer quantity. You can see this product pricing model at work on Souq and AliExpress.
Economy pricing is thus a great solution as a wholesale pricing strategy. It also can also work well for large, established retailers. However, it is not recommended for small businesses as it is unsustainable for e-commerce stores that don’t have a large offer or customer base.
3. Bundle pricing
This pricing strategy employs a bit of a psychological trick by selling multiple products for a lower price than if they were sold separately. This requires you to manufacture or sell product lines or complementary products. It is particularly popular in the beauty industry.
Bundle pricing is a good fit for both wholesale and retail businesses, regardless of whether they are beginners or well-established.
4. Psychological pricing
Psychological pricing refers to shaping prices based on the customer’s behavior and emotional responses. You can see it everywhere you turn — the famous $4.99 price is the trick that fools your brain into thinking you are paying 4 rather than 5 dollars for a product.
This type of product pricing is a great fit for any business. Given that plenty of excellent data tools can track your customers’ and website visitors’ behavior, you easily can use that feedback to shape your prices.
5. Premium pricing
Premium pricing is reserved for products that have a big competitive advantage in the market, usually based on high-quality and top-notch branding. In this case, buyers perceive the high price as a hallmark of quality and exclusivity.
This product pricing model is a good fit for well-known, established businesses, especially those that sell luxurious items such as jewelry, watches, or high couture. While it is not a good choice for new businesses, it can be used if your marketing team is skillful enough to communicate the unique value and brand of your product.
6. Price skimming
Price skimming is similar to premium pricing, as it also involves high product prices. However, the set of circumstances is different. With this product pricing model, businesses rely on the lack of competitors in the market, rather than quality and branding.
This strategy for pricing is a good choice for businesses that operate in a particular industry niche or tend to develop new products. However, keep in mind that it is not sustainable in the long run, as the market eventually will welcome competition that will decrease the price.
7. Pricing optional products
This pricing model also is used based on a small mind game. While the product itself is not expensive, businesses make up for it by charging for optional complementary products and services.
This product pricing model is particularly popular in low-cost airline companies, where the basic price is low, but additional services such as luggage, food, check-in, or seat selection are charged.
8. Promotional pricing
Promotional pricing is a periodic pricing strategy that includes offers such as free gifts, discounts, coupons, buy-one-get-one-for-free, etc.
It is among the most successful pricing strategies that tap into consumer psychology. It gives buyers a sense that they got a great deal by paying less for more. Promotional pricing is a great fit for any e-commerce business and it is probably a staple of the online retail industry.
9. Geographic pricing
The price of manufacturing, materials, customs, taxes, and delivery can vary greatly from one country to another. This is why it is a good idea to adjust pricing based on country or region.
This is particularly true for the Middle East, which comes with its own set of considerations for e-commerce. Here you can find more information about taxes in Saudi Arabia and the United Arab Emirates.
10. Value pricing
Value pricing refers to reducing the price of a product due to external factors, such as competition and recession. For example, you can employ a value pricing model to attract or retain customers who have a feeling they are getting a good value for the price. McDonald’s has maintained its position in the fast food market by generously employing this pricing model.
As your business develops, you probably will have a chance to use all of these product pricing strategies, some of them at the same time. However, how to use them to your advantage at the right time has a learning curve.
What is important is that you don’t end up paralyzed by fear that the price is going to be “wrong”. Both in wholesale and retail, product prices and pricing strategies are dynamic.
Keep in mind, no matter how your prices change, they will work for your customers as long as you clearly communicate the value proposition.
We are Fetchr; a company specialized in e-fulfillment. We help e-commerce entrepreneurs grow their business in the Middle East. Let’s make it happen! One box at a time. Learn more here.
This blog is intended for informational purposes only, and should not be considered business or legal advice. MENA 360 DWC-LLC (Fetchr) will not be held liable for the use, non-use or misapplication of this information, lost profits, personal or business interruption, or any other loss.