How to Price A Product The Smart Way: 10 Expert Tips
Here’s a question for you: how to price a product the right way? Is there a certain markup you stick to when devising how much you’re going to charge your customers. Pricing all starts with evaluating costs, and that includes overhead and anything that you wouldn’t consider a product cost. After all, you’ll have to recoup every single one of your costs in order to remain profitable.
There are strategies on how to choose the right price for your product that you should know about if you plan to succeed (or survive) in any competitive marketplace.
1. Similarly Priced Items are Demotivating
According to a research from Yale, if two or more similar items have the same price, consumers are much less likely to buy one than if the prices are even slightly different. So, identical price tags for multiple products might not work as smoothly as you hoped initially. For instance, in one experiment, the researchers noticed that 77% of users chose to buy a pack of gum when the prices were 62 and 64 cents. In another experiment, when both packs of gum were priced at 63 cents, only 46% chose to buy a pack.
Of course, it doesn’t mean you have to change all your prices now, it’s just that you should keep in mind that when you have similar products, but with different features, try changing the prices slightly. See if it works.
2. Weber’s Law — The Just Noticeable Pricing Difference
Weber’s law (or the Weber–Fechner law) is a principle often applied to marketing, that’s why you should do a bit of research on it. Basically, it says that a change in “something” is affected by how big that “something” was beforehand. It’s useful when it comes to price increases, where the magic number is somewhere around 10%.
Apparently, consumers hardly notice this difference. Or if they notice it, they tend to accept it. Of course, there is also a minority that might complain. However, there are many other variables (supply/demand, reputation, etc.) that can affect pricing. But do take a closer look at Weber’s law. It’s quite an interesting testing guideline.
3. Price anchoring
Anchoring, or focalism, is a common cognitive bias that describes the human tendency to rely too heavily on the first piece of information offered (the anchor) when making decisions. Imagine now a $400 product next to a $6000 product. The $400 one looks like a bargain next to the other one.
Thus, during decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. There are many places where this is popular (remember the last restaurant menu you browsed through?). In short, placing premium products near standard ones can create a rather clear sense of value.
4. The Simplest Formula of Them All
This isn’t the most popular pricing method on the list, but it’s the easiest. If you’re just getting started out or you have lots of items that need to be priced quickly, consider working with the simplest formula out there.
Here’s what it looks like
Final Retail Price = [(cost of the item) ÷ (100 — the markup percentage)] x 100
This instantly figures in the cost of the item and asks how much of a margin you’d like to make on the sale.
5. Going with the MSRP
The manufacturer suggested retail price has some benefits and downsides. It removes you from the decision making process, so if you’d like to save time and not worry about pricing at all, the manufacturer of your product often gives suggestions for what to sell the item at. However, this doesn’t give you much of an advantage over competitors.
In addition, if you’re a company that makes products in-house, there’s no manufacturer to turn to. You’re the manufacturer, or the manufacturer you’re sourcing from doesn’t known how much should be charged because you have such a unique product.
6. Pricing Based on Competition
Competition often comes into play when thinking about your pricing strategy. For this one you can either choose to go above or below your competitor’s pricing for the same, or comparable, products. All you have to do is select the competitor pricing as a benchmark and make your pricing higher or lower.
Below competition is tough to sustain as a small retailer, but if you get some solid deals from you manufacturers it just might work. Pricing above the competition doesn’t stand up if your demographic is too price sensitive. On the other hand, it’s a wonderful pricing method if your customers perceive higher pricing as being a better product. Think of Apple for example. They make pretty much the same products as all the PC manufacturers but the pricing is double on computers.
7. Affecting Customers With Psychological Pricing
Here’s a pricing strategy that you see from almost every retailer in the world. The only time it’s not going to work is if you’re selling products that have a higher perceived value, like that of an expensive piece of jewelry or an Apple product.
All you have to do is change the pricing just slightly to end with an odd number. So, if your item is currently priced at $10.00, changing it to $9.99 completes a psychological effect in the customer’s mind that the product is much less expensive. In fact, many studies have shown that customers perceive $9.99 as being more similar to $9 than it is to $10.
8. The Loss-Lead Tactic
How many times have you walked into a store to take advantage of a promotion and end up purchasing some other items as well?
This is what we call loss-lead pricing, since it lures customers in with an incredible deal that can’t be found anywhere else. After that, it’s far more likely for people to grab some additional items while they’re shopping. The only problem is that you don’t want to train customers to expect discounts from you at all times.
However, it’s a wonderful strategy for companies selling products with complementary items, such as video game consoles and the games or shavers and shaving cream.
9. Keystone Pricing
Ah yes, the most popular pricing method out there. The keystone option is not only effective, but it’s used by quite a few retailers. The process is simple: Take the wholesale cost that you paid for the product and double it. One of the reasons this is such a popular technique is because the markup often ends up being a little higher than what it should be, bringing in more money.
However, sometimes you’ll sell yourself short with this method, especially if you have slow turnover, high shipping costs or if the product is unique in some way. That said, it serves as one of the quicker and more effective pricing solutions out there.
10. Multiple Pricing
Quite a few industries use the multiple pricing method. You’ll see it most frequently in grocery stores, clothing shops and even in the electronics industry. Multiple pricing is another name for bundling, since studies have shown that when a product is bundled with complementary items (like a shaving razor with additional razor attachments,) you’re likely to sell more.
The main benefit of multiple pricing is that you’re convincing customers that they are getting more value for a relatively cheap modification on your end. However, if you ever try to sell the product separately, the customers will have a tough time pulling the trigger, since they think they’re missing out on a huge value with the bundle.
Any Other Favorite Pricing Practices You’d Like to Share?
In terms of getting started, we recommend looking at both the simple formula and the keystone pricing options. After you’ve established how much customers are willing to pay you can gradually adjust so as not to spook the users when they see a completely new price.
If you have any other pricing suggestions for our readers, or if some of this doesn’t make sense to you, feel free to drop a line in the comments section below.
header image courtesy of stocksnap.io
Originally published at ecommerce-platforms.com on August 22, 2016.