Whether you’re launching a new business, a new store or a new website, you’ll need to consider the pricing of your products. Product-pricing is the cornerstone of every business. It determines your profit margins and what your business can or can’t afford.
Ultimately, you want to make a profit. If you don’t have a pricing strategy, it could mean your products fail, or worse your entire business fails.
The best way to test your pricing is with real customers. After all, you can adjust your prices. Even so, it is best to create a pricing strategy before you launch your business, shop or website.
Very quickly, we will look at the fundamental dos and don’ts of pricing strategy:
Let’s look at a few different pricing strategies. You’ll need to crunch the data and work out what works best for you, but we will explain each strategy as we go along.
Cost-based pricing is the most common strategy for product-pricing. There’s a very simple formula to work out your product price.
Cost + Markup % = Price
What does this mean?
You need to calculate the cost of your product. This includes material, labour, shipping, overhead and other costs. Let’s say the cost is £60. You then need to decide on the markup percentage. Typically, this is 50% of cost. The markup is 50% of £60. £60 x 1.5 equals £90. Your product price is £90.
Of course, you might decide to reduce or increase your markup percentage, or increase or decrease your production costs, which will influence your profit margins.
This brings us onto the next strategy.
In this strategy you’re comparing your product to the wider market to determine your product price. This means you need to look at competitor pricing and perform competitor analysis. Once you understand what your competitors are charging for their products, you can use information to guide your own pricing strategy. For this example, we will say that most of your competitors are pricing their products at £90.
It may be tempting to copy your competitors’ pricing, but what works for them may not work for you. Here’s what you need to consider.
You will need to consider several market factors that will help you determine your product price. Consider your costs (£60), the quality of your product compared to competitors, your target audience, and your marketing, as well as any other relevant factors that may influence pricing.
You have 3 options.
Firstly, you can undercut the market. Your strategy is to charge less than £90 for your product, providing a cheaper alternative to the market. You still want to make a profit, so lower your markup percentage to 40% and your product price is now £84. Your profit margin is lower, but you may be able to lure your competitors’ customers away with your more affordable pricing. Compare your product’s quality to your competitors. You may be able to provide a higher quality product at a lower price.
Consider that your target audience may be wary of spending less on a product if they think it lacks quality. Some people will pay a premium for a higher quality product and will avoid the cheapest option.
Secondly, you can copy the market. This is self-explanatory. Your competitors are charging £90 so you charge £90. The factors that determine your success are product quality and marketing.
Thirdly, you can price your product above market value. You’ll be charging upwards of £90 for your product. Your product will be a premium on the market so your marketing and product quality should better reflect the premium price. The customer will want to see some clear advantages of paying a little bit extra for your product. This could include good customer service, free delivery, durability, or many other factors that make your company and product better than the cheaper alternatives.
As we suggested earlier, you don’t need to settle on one price for your product that you stick with forever. After all, the market changes. Your competitors will adjust their pricing and so should you. Your price should be dynamic. Your price might change daily, weekly, monthly or yearly. Your price might rise or fall, depending on factors like supply and demand, seasons, holidays or events.
The best example of this is taxi services. Taxis will cost more when demand is high and supply is low. This helps companies maximise their profits in response to changes in the market.
You also see large retailers doing this. Prices fall during black Friday, the January sales, or during off-peak seasons. Increase your prices when you expect to be busy.
When you first launch, you’ll need to be dynamic with your pricing. As we said at the beginning of this piece, the best time to experiment with pricing is with real customers. If your product is struggling to sell, consider lowering your markup percentage. Likewise, if your product is flying off the shelves, consider raising your prices.
It’s important to understand concepts like supply and demand, and how much your customers are willing to spend on your products at any given time. The relationship between product pricing and consumer demand is called price elasticity. These concepts will help you price your products.
A good time to offer low prices is when your store is just opening. You want to drive traffic to this new location, website or business. By offering lower prices with a sale, you build brand awareness and build a customer audience. After your first week, month or year of trading, you can raise your prices now that you have loyal customers and lots of brand awareness.
Be prepared to adjust your pricing
If your product is priced at £90 and you have a conversion rate of 15%, then you’re still missing out on 85% of sales. Of course, you will never achieve a 100% conversion rate, but you should try and convert as many people as possible whilst still making a profit.
You can use marketing and remarketing to target those who visited your website but were put off by the price. Offer them a lower price. Provide them with discount codes, inform them when there’s a change in price, or when there’s a flash sale and they may be more willing to purchase your product. Let’s take a look.
Some of the audience who weren’t willing to pay £90 for your product may be more willing to purchase your product if it was priced at 40% markup, or £84. Let’s say your conversion rate at £84 is 10%.
Some of your audience who weren’t willing to pay £84 for your product may be willing to purchase your product at 30% markup, or £78. Your product cost is £60, so you’re still making £18 profit. Your conversion rate at £78 is a further 5%.
Now your conversion rate is a total of 30%, and you’re making more sales than you would have if you only priced your product at £90. You have made slightly less profit but more sales. Continue this strategy and you will increase your product sales dramatically.
Use discounts when you want to promote your products, draw new customers in, or reward existing customers. It’s a great way to drive traffic to your store and increase sales – even if you’re making less profit during that time. With any luck, customers will view your discounted products but purchase full-price products.
Try not to undermine your profits too much, or sell at a loss. Never reduce your prices below the production cost else you will lose money. That being said, this is a strategy called ‘loss-leader pricing’ but it’s risky and should only be attempted by businesses that understand their products, audience and profit margins extremely well.
Anchor pricing is a strategy used by large companies, typically tech companies, who are pioneers in their market. It’s a strategy used to sell high-value products or services.
Say you’re selling a laptop; It’s top of the range; there’s nothing like it. You tell your audience that the price of the laptop is valued at £1000. That’s expensive. But then you tell your audience that you’re actually selling it at £600. That’s the price. It’s not a discount. You’re selling a £1000 product for just £600.
Of course, your audience will want to buy it. It’s a bargain. What they don’t know is that your product doesn’t cost £1000. They just think they’re getting a good deal. This strategy is used by large companies like Microsoft, Apple, Samsung etc. Whether you think it’s the right strategy for you or not is up to you.
Still need help deciding your pricing…?
If you’re stuck deciding on a price, don’t worry about it too much. Use a cost-based pricing strategy and examine your competitors to determine a price you’re happy with. You can always adjust it.
There’s a lot to do when setting up your business’s e-commerce website. Conducting competitor analysis, designing your store and creating all the necessary systems and processes required for running a business, pricing and marketing your products… the list goes on. It’s a lot of work.
If you’d like some support generating more sales, improving your profit margins and growing your business, then look no further than Vertical Plus. We can help you get it right. We are eCommerce experts with a great understanding of UK markets.
We understand how to price products. We can help your business by creating a data-backed pricing plan for your products across your business to optimise your profit margins and generate sales.
To find out more about how Vertical Plus can help your business, give us a call!