Product pricing in product management is the procedure used by businesses to figure out the cost of the goods they sell to consumers. Depending on their requirements and the perceived worth of their products, businesses can select from a wide range of pricing techniques.
Companies must determine the price to charge customers after designing a product before putting their go-to-market (GTM) strategy into action. Product pricing is far more difficult than it first appears to be. Price optimization comprises several internal and external aspects, including determining a price that maximizes profits while accounting for development expenses, consumer demand, market and competitive data, and market conditions.
Table of Content
What is Product Pricing?
Product pricing is the procedure used by businesses to figure out the cost of the goods they sell to consumers. Depending on their requirements and the perceived worth of their products, businesses can select from a wide range of pricing techniques. Setting a price that is both attractive to buyers and greater than the product’s manufacturing cost is the primary objective of these methods since it encourages them to make a purchase.
Objectives of Product Pricing
- Survival: Every business faces the risk of being eliminated from the market due to fierce competition and shifting consumer tastes and preferences. As a result, all variables and fixed costs should be taken into account when estimating a product’s cost. After the period of survival has passed, the business can aim for greater earnings.
- Growth of present profits: The majority of the company looks to increase its profit margin by assessing the supply and demand for products and services in the market. Therefore, the price is set based on the demand for the product and its alternatives. Prices will rise in tandem with increased demand.
- Controlling the market: Companies set cheap prices to allow products and services to capture a sizable portion of the market. Due to the technique’s ability to raise demand and lower production costs, sales are increased.
- A market for a novel idea: in this case, the business charges a premium for its extremely unique and technologically advanced goods and services. The high cost of manufacture is the reason for the high pricing. Electronic devices and cell phones are two such.
What is Pricing Method?
A pricing method is a strategy used by businesses to assess the cost of their goods. This process is the hardest one a business faces because the pricing has to make money, complement the company’s expenses, and fit the present market structure. It must also take into account the prices of competitors’ products, therefore selecting the appropriate pricing strategy is crucial.
Types of Pricing Method
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Cost-Oriented Pricing Methods: The majority of businesses use the cost-oriented pricing strategy, which serves as the foundation for determining the final product’s price. The following divisions apply to this strategy.
- Cost-Plus Pricing: In this pricing strategy, the producer determines the ongoing cost of manufacturing and adds a certain percentage, sometimes referred to as markup, to determine the final selling price. The entire cost is used to calculate the profit markup (fixed and variable cost).
- Markup pricing: It involves adding a predetermined amount or a percentage of a product’s total cost to its final price in order to determine the product’s selling price.
- Target-Returning Pricing: In order to get the Rate of Return on Investment, a company or organisation sets the product’s cost.
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Market-Oriented Pricing Method: This type of pricing is based on market research.
- Perceived-Value Pricing: In this technique, the producer determines the price by considering the consumer’s perspective on the goods and services as well as other factors that may influence it, such as product quality, distribution, advertising, and promotion.
- Value pricing: In this scenario, the business creates a high-quality product at a reasonable cost.
- Going-Rate Pricing: Using the competitor’s rate as a guide, the business determines the price of its product using this technique. The price of the product will typically be roughly the same as that of its rivals.
- Auction Type Pricing: As more people use the internet, this modern pricing strategy is becoming more and more popular. A lot of online marketplaces, such as OLX, Quickr, eBay, and so on, use websites to purchase and sell goods to consumers.
- Differential pricing: This strategy is used when prices need to vary for certain clientele or groups. Here, prices may vary according on the product, time, locality, and/or region.
How to price a product
The following are some steps you can take to price things efficiently:
1. Calculate your variable costs per product:
Your variable cost is the amount you spend on producing and selling each product, so start there. Consider the following variable costs:
- Material costs
- Packaging costs
- Employee labour
- Sales commissions
- Production equipment maintenance
- Overhead costs
- Transaction fees
- Shipment and logistics costs
- Marketing costs
2. Add a profit margin
After calculating the costs associated with producing and marketing a product, think about the profit margin you hope to achieve. Usually expressed as a percentage, profit margin is the amount of money you get paid for a product after all costs have been met.
Target price = Variable cost per product / 1 - Your desired profit margin as a decimal
This means if your total variable cost is $15 and your desired profit margin is 20%, or 0.2, your formula may look like this:
Target price = 15 / 1 – 0.2
18.75 = 15 / 0.8
3. Assess the market
When you’ve decided on your perfect price, examine the market to make sure it’s a reasonable price that will draw clients. Determine whether you want to price your product lower, the same, or higher by looking at what your competitors are pricing for comparable goods. You can evaluate the product’s level of demand as part of your market research to see if your price is reasonable.
4. Set a price and monitor it
Set the price after you’ve decided on it and make the product available to buyers. To ascertain whether the price has to be changed, keep an eye on how your target market reacts to it. For instance, you may increase the price if sales are going more quickly than you anticipated, but you could also reduce it if they aren’t.
Top Product Pricing Methods
The specific process a company employs to determine a product’s price will differ based on the above mentioned elements.A few businesses employ a mix of pricing strategies. Still, there are a few standard pricing schemes that businesses employ. These are a few:
Value-Based Pricing
Value-based pricing is a method of setting prices so that they are determined by the value that consumers derive from goods or services rather than the cost of production.Value-based pricing firms base their retail price primarily on the value that customers ascribe to the product or service (i.e., what they are willing to pay), rather than on their competition.
Value-based pricing works best for companies that:
- Offer distinctive goods that are highly valued.
- Sell goods that are lightweight and effective and help clients expand their revenue dramatically.
- possess a small number of rivals in the market.
- possess extensive consumer perception data from market research.
Competitor-Based Pricing
Value-based pricing is the antithesis of competitor-based pricing. This pricing strategy based rates on those of rival businesses operating in the same industry. When determining the prices for their own goods and services, businesses should take their rivals’ pricing methods into account.
Competitive pricing is well suited to companies that:
- Promote goods with comparable attributes in a market that is competitive.
- own a small clientele and, as a result of competition, are unable to raise costs.
- just joined the market and don’t have a large clientele.
- own the tools required to monitor the pricing tactics of competitors.
- are at ease charging the same amount as rivals while providing superior goods or services.
Pricing Based on Cost Plus
The cost-plus pricing strategy is a method of setting a final price for a product or service by adding a percentage (the “plus”) to the manufacturing costs, which serve as the baseline.
Cost-based pricing strategies work best when the product or service has:
- High production costs (industrial items, for example).
- A limited number of rivals in the industry.
- A sizable customer capable of tolerating price rises.
Market-Oriented Pricing
Companies that use market-oriented pricing base their pricing decisions on consumer preferences and current market trends.While this approach is closely related to pricing based on competitors, it places more of an emphasis on comprehending the requirements and behaviours of customers than on keeping tabs on rivals.
Market-oriented pricing works well when businesses:
- Have a large customer base with diverse needs and preferences.
- Have a good understanding of customer needs and behaviors.
- Are able to respond quickly to changes in the market.
- Are comfortable with risks such as pricing experiments and variable pricing.
Dynamic Pricing
With dynamic pricing, businesses modify their rates in real time in response to consumer demand, market conditions, and other variables. To ensure that prices are set appropriately, this kind of pricing strategy mostly relies on analytics and data.
Dynamic pricing is most suitable for companies that:
- Have access to large amounts of customer data.
- Are able to respond quickly to changes in the market.
- Can create models or algorithms to analyze customer data and adjust prices accordingly.
- Are comfortable with risk.
- Have enough leverage to guarantee that customers will accept the pricing changes.
Factors to Consider in Product Pricing
In order to create a profitable and competitive price, businesses must take into account many aspects such as expenses, market demand, and their intended clientele.
Costs
A firm needs to make money all the time in order to survive. Furthermore, the revenue must exceed the expenses involved in producing and marketing a good or service.
Depending on the product and company structure, there are several costs they may incur:
- Product development and research (R&D)
- Ongoing upkeep (pertaining to software products)
- Costs of production (labour, utilities, and raw materials)
- Transport and allocation
Market Demand
The easy part is figuring out how much to charge. It’s a far more complex equation to figure out how much consumers are ready to pay and whether there is sufficient demand for the goods.
When assessing market circumstances, the following best practices should be kept in mind:
- Recognise the value that customers receive from the product or service.
- Examine the needs, habits, and demographics of your customers.
- Examine the price tactics used by rivals.
- Consider any variations in demand that may arise seasonally.
Target Audience
One important consideration in product pricing is an organization’s ideal customer profile (ICP). Based on market research and customer data, it is a thorough depiction of the ideal client that aids in helping companies target the proper market and offer more specialised pricing in order to increase revenues.
Market Prices
There are always going to be other companies fighting for market share, unless their business is the first of its kind, which is extremely rare. Businesses can set competitive rates within their industry once they recognise the value they provide to customers.
Ideal Profit Margin
The amount of profit a company makes after deducting all costs from sales is known as the profit margin. Ensuring a robust profit margin is crucial for a corporation to sustain operations, compensate staff, and yield returns for its investors. Businesses must take into account both the gross and net profit margins.
- Gross Profit Margin: The amount of money left over after deducting manufacturing costs from sales revenue is known as the gross profit margin.
- Net Profit Margin: The remaining revenue after all costs (such as marketing, overhead, and other operational expenditures) are deducted.
Distribution Channels
Businesses must take into account how they will distribute their products or services when setting product prices. Retail establishments, online merchants, digital retailers, direct-to-consumer (D2C) platforms, and more are examples of distribution channels.
Technology to Manage Product Pricing
Many software applications are available to assist companies in managing the prices of their products. Typically, these solutions provide analytics, price tracking, and optimization tools to help firms make more informed pricing decisions.
Pricing Engine
In order to calculate the appropriate price for each item, this method considers a number of factors, with the ultimate goal of assisting businesses in maximising profits through pricing optimisation.
Pricing Software
Businesses may make sure their prices are competitive by tracking and analysing pricing data with the use of pricing software. Additionally, it offers insights into consumer behaviour, which helps businesses decide more wisely how to price their products.
ERP
Although enterprise resource planning (ERP) isn’t precisely software for product pricing, it does aid in the effective management of business operations. This covers automated procedures such as financial reporting, processing sales orders, and inventory tracking.
CPQ
Configure, Price, and Quote, or CPQ, software facilitates the sales process from beginning to end. Businesses can use it to swiftly generate estimates, arrange their goods or services, and determine which pricing are ideal for specific clients depending on their requirements.
Conclusion on Product Pricing
In summary, the process of setting a price for a product is intricate and involves a number of variables, including expenses, market demand, rivalry, and profit margins. To achieve their goals, businesses use a variety of pricing strategies, such as market-oriented pricing, competitive-based pricing, cost-plus pricing, value-based pricing, and dynamic pricing. When choosing the best pricing plan, variables such as target market, market prices, and distribution channels are important considerations.
FAQs on Product Pricing
What do you mean by-product price?
Product price is the amount that consumers must pay to purchase a specific good or service. It is the monetary value that is allocated to a product.
What is by-product pricing?
calculating the price at which secondary items made from the primary production process should be sold and their cost
What is the meaning of product price setting?
Deciding the price at which a product will be offered for sale to clients.
What is product pricing theory?
The methodical process of figuring out a product’s ideal pricing depending on a number of variables.
What is product price and product cost?
Customers pay the product price, and production costs are what go into making the product.