How to set selling prices for products has and will continue to be a source of worries for both big and small businesses globally.
However, you should remember that the concept of product pricing is nothing but an estimate of the price customers will be willing and able to pay.
If price your products too high, you will scare away your customers.
On the other hand, if your prices are too low, you the risk running your business at a loss.
Therefore, you should aim at setting the prices of your products at levels that can keep you in business.
Here are some of the methods that you can use.
Set selling prices: Know the market
When considering which product to use for setting the prices of your products, you need to know your market in great details.
This is necessary because you may not be the only person selling the product in the marketplace.
There might be other vendors selling exactly or similar product in the same market.
Moreover, you should find out how customers are responding to the prices competitors have set for their products.
That will help you to decide whether to:
- follow the ruling market prices
- set your price a little higher or lower
- or stay in the middle of the two extremes
Therefore, monitoring prevailing market prices will enable you to fix selling prices of your products at competitive levels.
Set selling prices: Cost plus Method
Cost-plus is a popular product pricing method that you can use in your small business.
By this method, you can simply add an amount (profit) to the total cost of your product.
Remember that all expenses you made, including transportation, must be added to the actual cost of your product to arrive at total cost.
For example, if the total cost of a product is N100, you can just add N30 as your profit.
This will give you a selling price of N130.
This simple method is very popular with some manufacturers. It also works for small businesses.
Markup method of product pricing is yet another simple method you can use to fix the selling price of your product.
By this method, after you have ascertained the total costs of your product, you simply add on top say 35% as your profit margin. What you get will represent your selling price for the product.
Do not forget that from that 35% markup, you will need to minus your operating expense before you can talk of profit.
Set selling prices: Value Based Method
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 product or brand.
Consequently, your assessment can be be based on many factors, including:
- product quality
- ease of use
- customers user experience
This method is more or less a trial and error method. So you should ensure that your estimate of the value customers attach to your product approximates closely to what customers willing and able to pay.
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.
Price Discrimination Strategy
Still another product pricing strategy that you can use is 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 need to make sure that the markets you are selling to are far from each other.
This is because if the markets are close to each other, customers can easily detect the trick. If they detect it, you will lose your customers to your competitors.
Alternatively, you will be left with no choice than to lower your prices to align with the ruling prices in the market.
Therefore, to succeed with this method you also need to be smart.
Set selling prices: Late Payment method
Late payments method is another strategy you can use when setting selling prices for your products.
By this method, you can ask customers to pay a little more for your product to compensate for the extended time you will give them to pay you.
This is also a trial and error method. Customers who have positive cash flow may not key into this method.
On the other hand, customers who are having sleepless nights due to negative cash flow can easily jump at this incentive.
Most importantly, the obvious downside of this method is that as soon as customers recover from their cash flow problems, they will leave you.
Set selling prices: 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 can add N500 on top; making it N20,500.
Next, you can divide N20,500 by 100 cans. Therefore, the retail price of a can of milk will be N205 each.
The advantage of using this method is that it can help you to make:
- High sales turnover
- Little but rapid profits
- Your existing customers to stay with you
- Help you fight competition
- You able to attract new ones
- Your business will grow
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 successes in business.
Set selling prices: 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 high selling price for your product.
However, as the needs of the initial customers are satisfied, over time, you can begin to lower the price of the product to enable you keep your existing customers and to attract new ones.
Furthermore, if you fail to reduce your price for the product because of greediness, competitors who are already positioned to come into the market move in; thus resulting in price war.
Consequently, some of your competitors can even sell below their cost price, with the aim of kicking you out of the market.
Although price skimming is mainly used by big firms to launch new products, it can also work for a small business like yours.
However, if you can develop a unique brand or import products that are not common in the market, you can safely implement price skimming method, at least in the short term.
The major advantage of price skimming is that you can make quick profits before competitors move into the market.
Therefore, you must be smart, putting your ears down and nosing around for trending development.
Set selling prices: Market Penetration Method
Market penetration product pricing method is another strategy you can use when you want to set selling prices for your products.
By this method, you set low price initially for your product to attract customers to buy from you.
However, if you notice that there are no price objections, you can maintain a stable price or begin to increase your price little by little over time.
This method requires that, firstly, you need to:
- Keep your eyes on price movements in the market
- Look out if a competitor with huge resources is planning to enter the market
- So that you can prepare yourself for a tough competition.
The down side of this method is that you can suffer losses at the beginning, if your do not back it up with effective marketing strategies.
However with increase in awareness of your product, plus, effective marketing strategies you can enjoy a harvest of sales and profits before competitors come in.
Price Set By Price Setters
In some markets, price setters or market leaders determine the selling prices of some products.
For example, in the electricity sub-sector of Nigerian economy, consumers are price takers. They have no control over rates payable.
Therefore, if you find yourself in this type of sector, you should constantly track prices by following the ruling market prices. Or get ready to be kicked out of business!
Set selling prices: Economy Pricing Method
This pricing strategy involves reducing production and marketing costs as much as possible.
For example, if you are able to produce large quantities at low costs per unit, you can fix selling prices at levels that will enable you to optimize your profits.
Most importantly, you should ensure that you keep your eyes on your production costs.
Premium Pricing Strategy
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 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
- Continually market and promote your products
- Track and update your offerings to meet the needs of customers
- Package the products attractively so they are easy to handle
- Should design the interior and exterior of your shop attractively.
Set selling prices: Bundle Pricing Method
Yet another strategy you can use is the Bundle pricing method.
In this method, you group similar products that have similar cost curves and attach a single price to all the products in the basket.
Thus, you tend to make the customers feel that they are paying less than they would if they were to buy the products one by one.
You can implement this strategy:
- Towards the end of a product’s life cycle
- Or a product is experiencing low demands
- 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 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 tend to even out and you will be better for it.
Promotional Pricing Method
When you want to do product pricing in your business, you can sometimes try promotional pricing method.
This method usually involves offering discounts on particular products.
Furthermore, you can also introduce “Buy Two Get One” campaign. Customers like this type of offers.
Promotional pricing campaigns can be run on short term basis.
In other words, they should not be on for too long; otherwise you can suffer some financial loses.
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.
Most importantly, you can also use promotional pricing method by telling them to buy now while the stocks last. This method works fine for many businesses.
Set selling price: Captive Pricing
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 continue to use their networks.
Thus, 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, captive might be a better option for you.
In conclusion, remember that there a lot of product pricing methods that companies can use. The above are just the more commonly used methods.
Therefore, you should choose the pricing method(s) that best meet the needs of your business.
By Samuel Ijenhi, B. Sc. Accounting [University of Benin]
Benin City, Nigeria
Founder: Ijenhi Business Solutions