Today we’ll get into Product Pricing and Product Pricing Strategies. What’s product pricing and which strategies should I use while pricing my products?
Let’s go!
Table Of Content
1. What’s product pricing?
2. Key concepts on product pricing
3. Top Product Pricing Methods
4. Product Pricing Calculator
5. Key Takeaways
In this article, we will focus especially on the pricing of conventional business models when discussing pricing strategies. This implies that it might not be very flexible for SaaS, agencies, digital business models, consulting, or service sales. I’ll be talking about some purchasing and selling strategies in industries such as FMCG, tires, home appliances, textiles, electronics, and pharmaceuticals, as well as their pricing.
Before we start, do not forget to download our unique Product Pricing Calculator to make your pricing process hassle-free.
1. What’s product pricing?
Product pricing is the process of setting a price for a good or service. This process will take into account all the costs of making and selling it, as well as how much people are willing to pay. And this process is called product pricing.
The goal of pricing should be to match the value of the good or service with its cost and the demand from customers. This way, the business can make the most money while still offering competitive prices.
2. Key concepts on product pricing
Before getting into top product pricing strategies we should clarify some of the main concepts:
Costs:
When used in business, costs mean the total amount of money used to make or provide a service. This includes direct costs like labor and raw materials, as well as indirect costs like marketing, overhead, and administrative costs. Costs must be understood and managed in order to set prices that make sense, ensure profitability, and keep prices competitive.
Competition:
When there are many businesses in a market selling the same goods or services, there is competition. To understand competition when it comes to prices, you have to look at your competitors’ pricing strategies, market share, and products. Businesses often change their prices based on how the competition is doing in order to get new customers, make their products stand out, and capture market segments.
Value Proposition:
A value proposition tells the customer why they should buy a certain product or service. It makes it clear what a product or service does better than competitors in terms of benefits, value, and advantages. The value proposition tells you how much a customer is willing to pay for a product or service based on how valuable they think it is, what benefits it provides, and what problems it solves.
Price Sensitivity:
The way that people want to buy a good or service changes when its price goes up or down. This is also known as price elasticity. Customers who are highly price sensitive are likely to change the way they buy things in a big way when prices change. When businesses know how price sensitivity works, they can set prices that get the most sales and profits without turning off customers.
Regulations:
When talking about prices, regulations are the laws and rules that businesses have to follow when setting their prices. This can include laws that stop people from fixing prices or doing things that hurt competition, as well as rules that only apply to certain industries, like utilities and pharmaceuticals. Companies must follow these rules to stay out of trouble with the law and make sure there is fair competition.
Most Important Factors in Product Pricing:
Particularly in traditional business models, there are two basic aspects of pricing that we take into consideration first: 1. Costs, 2. Competition
The costs presses us from the bottom, while the competition limits us from the top.
Our underlying costs are essentially the first point. Because of the variable costs involved, there isn’t much room for us to decrease our prices too much.
For example, it might cost us 50$ to produce a product. In order to turn a profit, even if it only costs us 50$, we can only sell it for at least 55–60$ or even 70$. As a result, our initial options are initially restricted by base costs.
We cannot sell lower than our costs!
Now, the second item is actually the competition index, and this factor limits us from our upper limit. Again keep this example with the product that costs us 50 $. We may want to sell it for 100$, but you can’t go much above that if your competitors are selling at 80$, particularly if a well-known, premium brand is selling 75–80 units.
The second point contains some specific details. We’ll go into more detail about this later, but in short, this point is even more important than the others. The whole pricing story is going in between these first two points: Costs and Competition.
Where you fall on the scale, which is influenced by competition from above and costs from below, depends on the other factors. The other factors determine where you fit within the scale limited by costs from below and competition from above. In short, all other techniques, regulations, and positioning determine where you want to fit on this scale. Therefore, in traditional business models, you could say you are essentially trapped between costs and competition, regardless of any pricing methodology you use.
Some Other Concepts Related to Product Pricing
Product strategy is a comprehensive plan that outlines how a product will achieve the business goals and objectives of a company. It forms a critical component of the overall business strategy and encompasses several key aspects:
- Market Understanding: A deep understanding of the target market, including customer needs, preferences, and behaviors. This involves identifying the target audience, understanding their problems, and knowing how the product can solve those problems.
- Product Vision and Goals: Defining the long-term vision for the product, which includes what the company aims to achieve with the product in terms of market positioning, customer satisfaction, and financial goals.
- Product Differentiation: Establishing what makes the product unique compared to competitors. This could be through innovation, superior quality, additional features, pricing strategies, or better customer service.
- Roadmap Development: Creating a product roadmap that outlines the timeline and key milestones for product development, including when to introduce new features or enhancements.
- Product Lifecycle Management: Managing the stages of the product’s lifecycle, from development and launch to growth, maturity, and eventual decline, and planning strategies for each stage.
- Pricing and Positioning: Determining how the product will be positioned in the market and how it will be priced. This is crucial for attracting the right customers and achieving profitability.
- Marketing and Sales Alignment: Ensuring that the product strategy aligns with marketing and sales efforts to effectively reach and engage the target audience.
- Feedback and Improvement: Incorporating customer feedback and market trends into the product development process for continuous improvement.
3. Top Product Pricing Methods
Pricing strategies are very important to how profitable and well-positioned a business is in the market. Even though we’re mostly talking about traditional business models in categories like electronics, pharmaceuticals, textiles, tires, appliances, and fast-moving consumer goods (FMCG), these ideas can be used in many other fields as well. Costs, competition, market demand, and government rules are some of the most important things that affect these methods.
a) Cost-Plus Pricing
Cost-based pricing is the basis of many pricing strategies. This means that the selling price is set by adding a certain markup to the cost of making or buying a product. This method makes sure that all costs are covered and that there is still a profit margin. If it costs $50 to make a product, for example, it might be priced at $70 to make sure it makes money.
Now, there is not much to tell about the details of cost-pressure. That could be the subject of another article.
But in brief, you should consider all your costs including handling, delivery or transportation costs, production costs in the factory, and so on.
– This table is a cost calculation from Product Pricing Excel Template by Someka –
It’s fundamentally about costs.
But let’s say you are part of a sales organization, working independent of the factory side, of a large company. The production department tells you the unit cost is 50$. Then, there’s nothing much you can do about that. You can not price that product under this level.
b) Competition-Based Pricing
This is the strategy of setting prices based on how your competitors do and it is called competitive pricing.
Now the competition part is more flexible for the sales side. When we discuss competition, we are discussing the positioning of the competitors as well as the positioning you wish to take your brand.
Let’s say, you observe that the competitors’ prices range from 75 to 80-85$. You ought to take up a comparable range. Ultimately, it’s not feasible to offer the identical tire, refrigerator, or building material, for instance, for 150$ when the competition is only selling 75–80 units.
You cannot charge wildly disparate prices for the same or comparable product. It is possible to make small adjustments, which we will discuss in the following items.
In the end you’ll need to place it somewhere similar to your competitors.
– This comparison table is from Competitive Analysis Excel Template by Someka –
This is where brand strategy comes into play. In other words, how much lower or higher is your product than your competitors’? More importantly, what level will the customer accept? What can you make the customer accept?
c) Brand Positioning and Brand-Based Product Pricing
You may now be wondering where you should set your product’s placement at 75 or 70$. Maybe you decide to play at the highest premium price, or you consider cutting costs to lower your price.
For example, should you set yours at 90$ if everyone else’s is at 85? This is where your brand strategy is coming into play. How much better or worse than your rivals’ offerings can yours be? More importantly, what price point will the buyer accept? How can a price point be made more acceptable to the customer?
How will you persuade customers to accept this if you enter the market at 90$ and the leading premium brand in your product category is approximately 85$? You place yourself at 90$, 70$, or 110$ in relation to your largest rival, or the one you wish to base your pricing on, which is 100$.
How about your product portfolio?
But things start to get a little more intriguing. We will discuss this in more detail in a later article, but let’s just touch on one point for now. It matters also what your average price point is. Typically, a company produces more than one product. You produce a lot of goods, and this particular detail is crucial.
For example, one of your products may be ranked 80th, another 85th, and yet another 110th in relation to a competitor’s 100th index. It’s also critical to know where you want to stand in relation to the weighted average.
Price positioning is very important for businesses that have more than one brand. This means setting prices for different brands in a way that targets different groups of people. One example is that a premium brand might cost more than a budget brand, even if both brands sell the same things.
Let’s dive more deeper on brand position part of the issue. The positioning of products in a brand is also another factor.
Multi-Brand Approach:
For example, if your company uses a multi-brand approach, you might make detergent but rank it between 90 and 95 on an index scale of 100, which puts it in the same range as premium and significant competitors. But you also want to introduce a detergent line for the budget-conscious market. You release this product under a different brand name and try to position it around the 70 index for higher volume sales.
This is a standard procedure for businesses such as Unilever and P&G. For instance, Ariel detergent is positioned in the premium segment, whereas Zariel, another detergent, is positioned in a lower-priced segment despite having almost the same formula. In case your strategy calls for placing prices in relation to various brands, you have to modify the price index appropriately.
So, first costs from below impose constraints on you, and secondly the competition from above places limitations on us. We are now deciding where to place ourselves or our brands on that scale.
– This is from Product Pricing Calculator by Someka –
Price positioning and brand positioning are relevant in this situation. You arrange them based on their positions in the competition and specific indices.
Of course, when you do this, if your brands, that is, your competitors, also have brands in segments such as the economy segment or the middle segment, you are indexing the brands of the rival companies according to them. So you look at them within yourself. So things you can play with here are things like this.
d) Rules and Regulations
Now let’s move on to the fourth point, Regulatory Considerations. For instance, these strategies cannot be used solely to determine price in the pharmaceutical industry. You can’t just choose to be above or below a particular threshold.
Governments have set rules about how much drugs should cost, and you have to follow them. Which other industries might be subject to these rules? For example, the government may also regulate the cost of gasoline or running a gas station. Thus, this has its limitations. It goes beyond the expenses outlined in the first point and the rivalry covered in the second. There are additional variables at work. This is something to think about if you work in a sector like that.
Transfer pricing?
Transfer pricing is the subject of the fourth item’s second subpoint. There isn’t a lot of information online regarding this fascinating subject. Allow me to clarify. This relates to the pricing policies of big, multinational companies operating in various nations. Purchasing power parity is a notion that states that each nation’s purchasing power is assessed in relation to its own circ*mstances. A business such as P&G or Unilever, for instance, might charge one price for Algida ice cream in Italy, another in the UK, still another in Norway, and yet another in Japan.
The Big Mac Index, or McDonald’s hamburgers, is a prime illustration of this. This index looks at McDonald’s hamburger prices across various nations. Consider the tyre sector as an example. A multinational corporation, such as Michelin, might charge $100 for a product in Canada, but only $80 in South Africa, and possibly even as little as $70 in Algeria, a nation with a lower standard of living.
There is a lower bound to this, though. The mere fact that a nation has less purchasing power does not allow them to drastically cut prices. If they do, a problem arises. For example, wholesalers or traders may purchase a product in Algeria and attempt to resell it in Canada if it is sold for 70 units in Algeria and 100 units in Canada. Parallel trading is the practice of a parent company unintentionally competing in another market with its own product.
Parallel Trading?
Large multinational corporations apply specific regulations to their subsidiaries or companies in different countries in order to prevent parallel trading. They might, for instance, set a minimum price limit and say, “You will not go below this price, regardless of how low the competition or purchasing power is.” You must continue to be above this scale. Referring back to our earlier example, competitors were producing 85–90 units, while we were producing a product for 50 units. The parent company, however, advises us not to go below 70 units. Therefore, the range of our playing field is 70 to 90, or 70 to 85 units, as a lower value could result in the export of the goods to other nations and parallel trading. As a result, this starts to matter when it comes to our pricing strategies.
e) Marketing Strategies
Let’s move on to the final point, which deals with specific pricing and marketing strategies. Essentially, disregard all of the previous information we covered and think for yourself. Consider tactics you could employ on a temporary basis or tactics you could use exclusively to increase your market share.
Let’s go back to our example: competitors sells between 85 and 90$, while we produce a product for 50 units. I take it that we want to remain in this range? However, let’s imagine that we wish to enter this market with great vigor and that we have a sizable amount of capital.
Discounts as Gaining Market Share Strategy
As a young business, our goal is to gain market share. We set our entry price so low that we don’t consider profitability or costs. For example, we may decide to sell what would normally cost us fifty units for forty-five, and we will keep doing this for the next three months, anticipating a loss of one million dollars. The goal of this investment is to take up 3% of the market. This is how we approach pricing. If the product is of decent quality, we expect that customers will respond favorably to our initial 45-unit offering, especially considering that competitors are charging between 75 and 80 units. This is a periodic marketing strategy that is used occasionally.
>> You can download our Marketing KPI Dashboard Template to track the performance of your marketing efforts.
It’s not a very common tactic, and neither is it very logical or long-term sustainable. It is difficult to bring the market back to a profitable and reasonable level once you enter it at such a low price. Consumers might anticipate paying that less. In essence, you restrict your own approach to pricing. Of course, there are workarounds. Companies may, for instance, launch a single brand into the market, control it, and then relaunch the same product at 70 or 81 units under a different name, claiming the first one is no longer available. They make an effort to hold onto their position after obtaining a particular market share. Given its potential to seriously disrupt the market, this can be a disruptive and less preferred strategy.
f) Other Product Pricing Strategies
Apart from this, there are pricing methods that are applied from time to time, such as during Christmas time or on special days such as Black Friday. They are also called dynamic pricing. In these, ambitiously low prices can be given, considering brand positioning in itself, without paying much attention to profitability or competition, or on the contrary, very high prices can be increased in some periods. When the parity rates in countries fluctuate a lot, high prices may be increased in order to gain some advantages, and such moves may be made from time to time with the expectation that they will be accepted by the customer.
This item is actually an item that slightly disrupts what we have explained in the first four items to create a beautiful structure, but this can happen and is often done. Therefore, we need to include this among the factors we should consider among pricing methodologies.
4. Product Pricing Calculator
Ok you decide on your strategy, but how to calculate the prices your full list of products. Here’s our unique tool to calculate all your prices:
– This is the Dashboard Section of Product Pricing Calculator by Someka –
This tool is specially designed to ease the pricing process.
Download Someka Product Pricing Calculator to make quick and accurate cost estimations and add your desired margins.
5. Key Takeaways
In traditional business models, setting prices is a complicated process that involves weighing things like cost, competition, brand positioning, rules, and market opportunities. Different industries have different pricing policies.
- All pricing is between the lower end of costs and the upper end of competitors pricing.
- Then you should assess the market and decide on your pricing strategy mix.
- You should also keep in mind that there could be binding rules and regulations.
Recommended Readings:
How to Build an Ecommerce Financial Model? A Complete Guide
How To Prepare Competitive Price Quotes in Excel While Staying Profitable
