The following are the 15 most effective and popular methods to do product pricing in your business.
- Know Your Market
- Cost-plus method
- Markup method
- Value-based method
- Price discrimination method
- Late payment method
- Average Price method
- Price skimming method
- Market penetration Method
- Economy method
- Premium pricing method
- Bundled pricing method
- Promotional Pricing method
- Captive pricing method
Product pricing has and will continue to be a source of worry for both big and small businesses.
This is because, firstly, when you price your products too high customers will stop buying and move to your competitors.
Secondly, when you price your products too low, customers may assume that your products are of inferior quality.
Thirdly, if you do not set your prices at optimum levels, you risk running your business at a loss.
Most importantly, do not forget that the concept of price is nothing but an estimate of what customers will be willing and able to pay.
There are many product pricing methods companies use to fix the prices for their products.
However, this article is focusing on the more commonly used product pricing methods.
Therefore, it is hoped that the following product pricing methods will meet the needs of your business.
Know the market
When considering which product pricing methods to use in your small business, you need to know your market thoroughly.
This is necessary because you may not be the only person selling those products in the marketplace.
There might be other vendors selling exactly or similar products in the market.
Beyond that, you should find out how customers are responding to the prices competitors have set for their products.
After that, you should then decide whether to:
- follow the ruling market prices
- set your prices a little higher or lower
- or stay in the middle of the two extremes
Therefore, when pricing your products, you should find out how much your competitors are charging.
Cost-plus is a popular product pricing method that you can use in your small business. By this method, you should simply add a certain percentage to the cost of each product.
For example, if a product cost you say N100, you could just add N30 as your profit margin.
Your business expenses will be deducted from the profit margin to arrive at the profit figure.
This simple method is very popular with some manufacturers. It also works for small businesses.
Markup method of pricing products is yet another simple method you can use to fix the prices of your products.
By this method, after you have ascertained the unit costs of your products, you simply add on top say 35% as your profit margin.
Thereafter, you should deduct business expenses from the profit margin to arrive at your net profits.
Yet another product pricing method you can use in your small business is the value-based method.
In this method, the price you set is based on your estimate of the value customers attach to your products or brand.
Consequently, your assessment could be in terms of product quality, reliability and other benefits customers enjoy by buying your products.
As this is more or less a trial and error method, you should ensure that your estimate is reasonably close to what the customers would expect.
In order words, if you estimate rightly it might work for you. On the other hand, if you estimate wrongly, you may not get the desired results.
However, the advantage of using this method is that you might be able to make quick profits before competitors move in to share in your harvest of profits.
Price Discrimination Method
Still another product pricing strategy that you can use the price discrimination method.
Price discrimination method simply means selling your products to different customers at different prices in different markets.
However, for this method to work for you, you should ensure that the markets you are selling to are far from each other.
Do not forget that if the markets are close to each other, customers will detect it. And if they do, they will abandon you and take their business elsewhere.
Therefore, to succeed with this method you also need to be smart.
When doing product pricing in your business, you could consider the late payment method.
By this method, you will be asking your customers to pay a little more for your products to compensate for the extended time you will give them to pay you.
This is also a trial and error method. Customers who have not cash flow problems may not key into this method.
On the other hand, customers who are having sleepless nights due to cash flow problems might jump at the offer.
Most importantly, the obvious downside of this method is that as soon as customers survive their cash flow problems, they will leave you.
Average Price Method
Another product pricing method you can use in your business is the average price method.
For example, if a carton of milk containing 100 cans of milk cost N20,000, you should add N500 on top; making it N20500.
Next you should divide N20500 by 100 cans. Therefore, the retail price of a can of milk should be N205 each.
The advantage of using this method is that it should help you to make:
- High stock turnover
- More sales
- Little but rapid profits
- Your existing customers to stay with you.
- You able to attract new ones.
Our brothers in Onitsha in South Eastern part of Nigeria know and use this method a lot. It works very well for them. This is one of the secrets of their success in business.
Price skimming Method
Another strategy you can use when doing product pricing in your business is the price skimming method.
By this method, initially you set the prices of your products high.
As the needs of the first customers are satisfied, over time, you begin to lower the prices of your products to attract price sensitive customers.
Failing to do that can attract competitors to enter the market with the same or similar products that serve the same purpose. This could lead to price war.
Consequently, some of your competitors might even under-cut your prices, thereby all in an effort to kick you out of the market.
Although price skimming is mainly used by big firms to launch new products, it can also work for you.
However, if you can develop a unique brand or import products that are not in the market, you can safely implement price skimming.
The advantage of price skimming is that you might be able to make quick profits before competitors move into the market.
Market Penetration Method
Market penetration product pricing method is another strategy you can use when you want to do product pricing in your business.
By this method, you set low prices initially for your products to attract customers to buy from you.
But as soon as you notice that there are no price objections, you can begin to increase your product prices little by little over time.
However, when you notice that there are no price objections, you should begin to increase your prices little by little over time.
This method requires that, firstly, you need to keep your eyes on price movements in the market.
Secondly, you should watch if a big competitor with vast resources is planning to enter the market so that you can prepare your mind for competition.
The down side of this method is that you could suffer losses at the beginning, if the method is not well implemented.
Over time, however, the increase in awareness can drive sales and help your business to grow.
Price Set By Price Setters
In some markets, price setters in the market determine the prices for certain products.
For example, in the electricity sub-sector of Nigerian economy, consumers are price takers.The have no control over prices/rates.
You simply have to follow the ruling market prices; otherwise, you could be kicked out of business.
Economy Pricing Method
This pricing strategy involves reducing as much as possible your costs of production and marketing.
For example, if you are able to produce large quantities at low costs per unit, you should be able to fix low prices for your products.
The aim of this pricing method is usually to get new customers into your customer base.
If you are able to get more customers, you will drive more sales and profits. Plus, your business will grow.
Premium Pricing Method
Premium pricing is one of the methods you can also use to do product pricing.
This method is mainly used by big companies to launch new product.
However, you too can use it in doing product pricing if and only if you can develop a unique product/brand or import a product that is not in the market before.
With premium pricing, you can set high prices if you have unique products which your competitors do not have.
In order to succeed with this product pricing method, you need to ensure that you:
- Provide high quality products customers can hardly find anywhere
- Support the high quality with excellent customer service
- You should continually market your products,
- Track and update your offerings
- Package the products attractively so they are easy to handle
- You should design the interior and exterior of your shop attractively.
Bundle Pricing Method
Yet another strategy you can use when you want to do product pricing in your business is the Bundle pricing method.
In this method, you group certain similar products that have similar cost curves and attach a price for all the products in the basket.
Thereafter, you can sell the products at one single price. Thus, you tend to make the customers pay less than they would if they were to buy the products one by one.
You may choose to implement this strategy towards the end of product’s life cycle.
Besides, it is helpful if the products are of the slow selling type. Or are nearing expiry dates.
The advantage of this product pricing method is that you tend to make customers to feel that they are getting good value for their money.
Therefore, the profit leaders in the bundle will compensate for the loss leaders in the bundle. At the end of the day prices level up. And you are better for it.
Promotional Pricing Method
When you want to do product pricing in your business, you should sometimes try promotional pricing method.
Promotional pricing involves offering discounts on particular products.
For instance, you can provide your customers with vouchers or coupons that entitle them to a certain percentage off the selling prices of the products.
Furthermore, you could also introduce “Buy One Get One” campaign. Customers like this type of offer.
Promotional pricing campaigns can be run on short term basis. In other words, they should not be on for too long; otherwise you could suffer some financial loses.
Most importantly, you can also use promotional pricing method to give incentives to customers by telling them to buy now before it is too late. This pricing strategy works fine for most businesses.
Captive Pricing Method
Captive pricing is another method you can use when you need to do product pricing in your business.
For example, when network telecom providers sell data to you, you must continue to buy data as long as you use their networks.
You are, effectively held captive until you decide not to use the network again.
Therefore, if you have products that customers will continually renew or update, you should consider using captive pricing method.
In conclusion, the above list of product pricing methods may seem intimidating. Therefore, you should choose the pricing method(s) that best meet the needs of your business.
By Samuel Ijenhi